BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SJR 21 HEARING: 6/13/12
AUTHOR: Kehoe FISCAL: No
VERSION: 3/6/12 TAX LEVY: No
CONSULTANT: Phan
FEDERAL TAX EXEMPTIONS: RETIREMENT FUND
Urges the President and Congress to enact legislation that
would extend to non-public safety officers the tax
exemption and benefits that public safety officers have
under the Pension Protection Act of 2006.
Background and Existing Law
On August 7, 2006, President George W. Bush signed into law
the Pension Protection Act of 2006 (PPA), which amended the
Employee Retirement Income Security Act of 1974 (ERISA).
The PPA closed loopholes that allowed some companies to
underfund their plans, raised the cap for employers who
invested in their own plans, and gave employees greater
control over how their accounts were invested, among other
provisions.
The PPA changes several provisions related to public safety
officers, defined as police, firefighters, and emergency
medical service personnel. The PPA allows eligible public
safety officers to use their qualified retirement plan to
pay for medical and long-term care premiums tax free. An
"eligible public safety officer" is someone who separated
from service because of a disability or has reached
retirement age of 65 years old. Eligible public safety
officers can use their distribution to pay for their own,
spouse's, or any dependent's premiums, and up to $3000 of
that payment is tax-free each year. The retirement plan
provider must directly pay the healthcare premium using the
retiree's distribution. No program exists for retirees
other than public safety officers to receive a
tax-exemption on their healthcare payments.
Federal law imposes an additional 10% income tax on a
retiree's distribution from a qualified retirement plan, as
defined, if the retiree decides to receive distributions
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from a retirement plan early. Federal law exempts this 10%
surtax if the employees separate after they are 55 years
old. The PPA lowers this age threshold for public safety
officers to 50 years old.
Proposed Law
Senate Joint Resolution 21 makes 5 findings related to the
PPA's provisions about public safety officers. Based upon
these findings, it urges the President and Congress to
amend the Internal Revenue Code so that all retirees can
receive a tax exemption when they use their retirement
distribution to pay for medical or long-term care premiums.
It also urges Congress to create parity by offering all
qualified retirement plan participants the same benefits
given to public safety members under the PPA.
The Secretary of the Senate must transmit copies of this
resolution to the President and Vice President of the
United States, to each Senator and Representative from
California who is in Congress, to the Commissioner of the
Internal Revenue Service, to the Secretary of the
Department of Labor, and to the author for appropriate
distribution.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to Census projections,
3.5 million baby boomers will turn 55 annually and are
already retired or are quickly approaching retirement age.
A concern for people during retirement is healthcare costs.
Experts estimate that the average retired couple will
spend 24% of their annual income on healthcare, with this
rate increasing to 35% by 2030. Extending a tax exemption
on healthcare payments from retirement distributions to all
retirees, not just public safety officers, can alleviate
retirees' financial burden. Expanding the base for
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tax-free distributions also encourages employees to save
more in their retirement accounts and potentially encourage
employees to purchase long term care insurance. Finally,
enabling more people to pay for their own healthcare will
alleviate the government's burden to pay for their
healthcare.
2. Parity . One of SJR 21's resolutions urges Congress to
create parity between public safety officers and non-public
safety officers. If Congress does so, besides giving all
eligible retirees a tax exemption on their distributions
used for healthcare payments, Congress also would have to
exempt all retirees from a 10%-surtax on their distribution
if they claim their distributions early but are over the
age of 50. The current age threshold for non-public safety
officers to avoid this tax is 55. Lowering the age
threshold for everyone from 55 to 50 may discourage people
from saving for their retirement longer. The Committee may
wish to consider amending SJR 21 to delete this parity
language and include only the provisions related to
tax-exemptions for healthcare payments.
3. Cost of conformity . The proposals in this resolution
will likely lead to state and federal revenue losses.
Conformity helps taxpayers and tax enforcement authorities
alike by reducing differences between state and federal tax
codes. However, the state may disagree with Congress's tax
policy changes, and conformity can also significantly
impact state revenues. If Congress enacts SJR 21's
provisions, no retirement distributions spent on
healthcare, up to $3000, may be taxed for state tax
purposes. California will lose General Fund revenue from
these untaxed distributions. The Committee may wish to
consider whether this is a policy the state wants to
encourage at this time.
Support and Opposition (6/7/12)
Support : Dan McAllister, San Diego County Treasurer
(Sponsor); San Diego County Board of Supervisors; County of
San Diego; California State Association of Counties;
California State Teachers' Retirement System; Congress of
California Seniors; Retired Employees of San Diego County.
Opposition : Unknown.
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