BILL ANALYSIS �
AB 726
Page 1
Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 726 (Morrell) - As Amended: May 2, 2011
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal income taxes: exclusions: rollovers
SUMMARY : Excludes from gross income amounts distributed out of
a 401(k) plan to an individual if the entire amount does not
exceed $100,000 and is paid into a health savings account (HSA)
within 60 days. Specifically, this bill :
1)Waives the 2.5% tax penalty for early 401(k) distributions
that are excluded from gross income under this bill.
2)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Defines gross income, for purposes of the Personal Income Tax
(PIT) Law, as all income from whatever source derived, unless
specifically excluded.
2)Conforms generally to the federal retirement plan rules,
including the additional tax on early distributions. However,
the additional tax on early distributions is generally 2.5% in
lieu of the 10% early-distribution tax imposed by federal law.
3)Does not conform to any of the federal HSA provisions.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates revenue
losses of $2.2 million in fiscal year (FY) 2011-12, $1.5 million
in FY 2012-13, and $1.5 million in FY 2013-14.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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Currently, by the nature of a tax-deferred retirement
account, such as a �401(k)], one is taxed upon withdrawal
and then further charged a penalty tax for early removal of
such funds. As a result, individuals who are already
dealing with hardship from medical costs are unable to take
full advantage of the money they have set aside for a rainy
day. This bill would allow for the exclusion from this
penalty tax for money removed from a specified savings plan
and deposited directly into a health savings account.
Those already dealing with the stress of medical
complications should not be penalized for using their money
toward an emergency.
2)FTB notes a number of implementation and policy concerns in
its staff analysis of this bill, including the following:
a) "California does not conform to federal HSA rules. The
bill does not provide a definition for a health savings
account. As a result, any account labeled as an HSA,
whether or not �it] meets the federal requirements of an
HSA, could potentially be funded as an HSA. The absence of
definitions to clarify what an HSA is could lead to
disputes with taxpayers and would complicate the
administration of this exclusion from gross income. If the
author's intent is to follow the federal definition, the
bill should be amended with cross-referencing to the
applicable federal provisions."
b) "The language of the bill would allow a payment or
distribution to "a health saving�s] account." The
distribution or payment could go to someone else's HSA,
other than the taxpayer's. If this is not the author's
intent, it is recommended that the bill be amended."
c) "Although a number of bills have been introduced to
conform to federal HSA rules, the �Legislature] has not
adopted legislation conforming to those rules. As a
result, California does not recognize HSAs as tax-favored
vehicles for providing for healthcare costs. This bill
would create an additional difference between the federal
and state tax treatment of HSAs and distributions from
�401(k)] plans."
d) "This bill limits the exclusion to only distributions
from a �401(k)] account. There are other types of accounts
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that are within the definition of "eligible retirement
account." Owners of the other types of accounts (e.g. IRA
accounts) could view this as unfair treatment. A
distribution from an IRA account to an HSA would result in
the taxpayer being assessed a 2 percent additional tax, on
top of the distribution being included in gross income,
whereas, if the distribution is made from a �401(k)], there
would be no tax assessed. The result is two different
treatments for the same type of transaction. Additionally,
federal law does not provide a waiver of the ten percent
penalty for a withdrawal from a �401(k)] plan to fund an
HSA. Allowing the penalty waiver for state purposes is in
conflict with federal tax policy."
e) "Federal law allows a one-time distribution from an
Individual Retirement Plan (other than �a] simplified
employee pension plan or a simple retirement account) to an
HSA. In addition, federal law does not provide a waiver of
the 10 percent penalty for withdrawals from �401(k)s] to
HSAs. Consequently, the provisions of this bill appear at
odds with federal HSA and �401(k)] policy."
3)Committee Staff Comments:
a) Eligible retirement plans : Federal law provides for a
variety of "eligible retirement plans" including:
i) Qualified retirement plans under Internal Revenue
Code (IRC) Section 401(a);
ii) Qualified annuity plans under IRC Section 403(a);
iii) Tax-sheltered annuities under IRC Section 403(b) �a
"403(b) annuity"];
iv) Eligible deferred compensation plans maintained by a
state or local government under IRC Section 457; and,
v) Individual retirement accounts (IRAs) under IRC
Section 408.
Distributions from eligible retirement plans are generally
included in income. In addition, a distribution from a
qualified retirement or annuity plan, a 403(b) annuity, or
an IRA received before age 59 is generally subject to a
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10% early-withdrawal tax on the amount includible in
income, unless an exception applies under IRC Section
72(t). For example, exceptions apply to distributions that
are: (1) used for the health insurance premiums of an
unemployed individual; (2) used for medical expenses; (3)
attributable to the employee's being disabled; (4) made to
a beneficiary on or after the employee's death; (5) made to
an employee who separates from service at age 55 or older;
(6) made to individuals called to active duty; and (7) used
for first-time home purchases.
b) HSAs : Under federal law, individuals with a high
deductible health plan, and no other health plan other than
a plan that provides certain permitted coverage, may
establish an HSA. In general, HSAs are tax-exempt trusts
or custodial accounts established exclusively to pay for
the qualified medical expenses of the account holder and
his/her spouse and dependents. Within certain limits,
contributions to an HSA are deductible. In addition, HSA
earnings are not taxable, and distributions for qualified
medical expenses are not included in gross income.
c) Treatment under California law : California generally
conforms to the federal retirement plan rules, including
the additional tax on early distributions. However, the
additional tax on early distributions is generally 2.5% in
lieu of the 10% federal early-distribution tax.
California has not, however, conformed to any of the
federal HSA provisions. As such, the California PIT return
starts with federal adjusted gross income and requires
adjustments to be made for the differences between federal
and state law.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
AB 726
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319-2098