BILL ANALYSIS �
AB 2576
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Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2576 (Harkey) - As Amended: April 22, 2014
Policy Committee: Revenue &
Taxation Vote: 5-2
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill conforms California tax law to federal tax law with
respect to health savings accounts (HSAs) for taxable years
beginning on or after January 1, 2014. In summary, this bill:
1)Allows eligible individuals to claim an "above the line"
deduction for contributions to HSAs in computing their
adjusted gross income, and excludes any contributions to an
HSA made by an employer on an employee's behalf.
2)Includes HSAs as an approved option in a nontaxable cafeteria
plan for employee benefits created by an employer.
3)Adopts a number of other changes to conform to federal changes
to HSAs enacted in 2006, including, among others:
a) Permitting the funds remaining upon termination of
health flexible spending arrangements or health
reimbursement arrangements to be transferred to HSAs.
b) Permitting participants to make a one-time rollover
distribution from an individual retirement account to fund
an HSA.
c) Eliminating the requirement to prorate HSA contributions
based on the number of months of enrollment in a
high-deductible health plan in the first year of
enrollment.
FISCAL EFFECT
AB 2576
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1)Potentially significant GF costs to Franchise Tax Board (FTB)
to administer the changes to forms and systems.
2)Estimated GF revenue decreases of $80 million, $55 million,
and $55 million in FY 2014-15, FY 2015-16, and FY 2016-17,
respectively.
COMMENTS
1) Purpose. According to the author, this bill would conform
California tax law with federal tax law regarding HSAs by
providing a tax deduction based on contributions. The author
contends California is currently one of only three states that
does not conform.
AB 2576 encourages the use of HSAs and extends the options for
contributing to HSAs to eligible HSA employers. The author
contends encouraging the uninsured to purchase health
insurance by allowing this tax deduction will reduce the
overall costs associated with providing healthcare to
uninsured individuals.
2) Health Savings Accounts. Current state law permits
tax-advantaged growth in HSA funds and the use of those funds
for qualified medical expenses, conforming to federal rules
for Archer medical savings accounts (Archer MSAs). California
has not adopted the federal rules for HSAs, and as a result,
California taxpayers will be disadvantaged if they decide to
roll over Archer MSAs to HSAs.
Proponents claim HSAs have helped make healthcare more
affordable by allowing families to pay lower premiums under
"high-deductible plans" while saving money for medical
emergencies in tax-advantaged accounts. Proponents argue
healthcare premiums may rise substantially under the
Affordable Care Act, and more Californians may look to
high-deductible plans to manage the premium increases.
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, his or her spouse, and any dependents. Within
certain limits, contributions to an HSA are deductible. HSAs
AB 2576
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allow tax-deductible deposits and tax-free withdrawals, as
long as the funds are used for qualified medical expenses.
3) Opposition. Opponents argue first that HSAs encourage
underinsurance by shifting cost risk to consumers. Since HSAs
are paired with high-deductible health plans, they are most
effective at reducing the utilization of heath care, rather
than addressing rising health care costs. Opponents also
argue that HSAs favor higher income taxpayers. In 2008, the
US Governmental Accountability Office found the median income
of tax filers reporting an HSA contribution was $139,000.
According to the report, many HSA participants appear to be
using their accounts purely or primarily as a tax-advantaged
savings vehicle rather than paying for out-of-pocket health
care costs. The GAO found that 41% of tax filers reporting
HSA contributions in 2005 did not withdraw any funds from
their accounts at any time during the year.
4) Affordable Care Act. The ACA, passed in March 2010, requires
most citizens and legal residents to have health insurance by
January 1, 2014. The ACA outlines the minimum coverage and
essential health benefits that must be provided for a plan to
qualify for the mandated coverage. The ACA may reduce the
need for HSAs given the expansion of Medicaid coverage.
Individuals who would have signed up for an HSA may not do so
if they are able to purchase more affordable health care or
are covered under Medicaid. Conversely, the ACA may also
encourage the use of HSAs. Starting with 2014, businesses
with 50 or more full-time employees must offer health
insurance plans. These businesses might opt for
high-deductible plans that can be coupled with HSAs. Some
experts believe high-deductible plans coupled with HSAs will
be the most affordable way to meet the requirements for
minimal essential coverage
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081