Summary of Federal Income Tax Changes

The provision amends 50 U.S.C. section 4001 to provide that for purposes of tax residency, the spouse of a servicemember would not lose or acquire a residence or domicile with respect to the spouse being absent or present in any U.S. tax jurisdiction when the spouse has joined the servicemember in compliance with the servicemember’s military orders regardless of whether the residence or domicile is the same for the servicemember and the spouse.

In addition, for any taxable year of the marriage, a servicemember and their spouse may elect to use for purposes of taxation regardless of the date on which their marriage occurred, any of the following:

• The residence or domicile of the servicemember.
• The residence or domicile of the spouse.
• The permanent duty station of the servicemember.

This provision expands automatic enrollment in retirement plans (401(k) or 403(b)). An arrangement or agreement meets the automatic enrollment requirements if such arrangement or agreement is an eligible automatic contribution arrangement and meets the following three requirements:

• Allows for permissible withdrawals from an eligible automatic contribution arrangement.
• Has a minimum contribution percentage:
  • No less than three percent and no more than 10 percent,
  • That provides an automatic increase in the contribution percentage of 1 percent to at least 10 percent but no more than 15 percent effective for the first day of each plan year after a completed year of participation unless the participant elects no contributions made or at a different percentage, and
  • for certain plans ending before 01/01/2025, initially provides a maximum percentage of 10 percent for an arrangement that does not meet the safe harbor requirements.
• Allows automatically contributed amounts to be invested under Department of Labor (DOL) regulations, if the participant makes no investment election.

Automatic enrollment would not apply to certain plans, such as a SIMPLE 401(k) plan, cash or deferred arrangement plan or annuity contracts established before 12/29/2022, government or church plans, any qualified cash or deferred arrangement, or any annuity contract purchased under a plan while the employer maintaining the plan is in existence for less than three years or has less than 10 employees. For multiple employer plans, the automatic enrollment is applied separately to each employer.

This provision would increase the nonrefundable income tax credit for small employer pension plan startup costs from 50 percent to 100 percent for employers with less than 50 employees. Employers with between 51 and 100 employees would continue to be eligible for the 50 percent credit.

This provision provides an additional nonrefundable employer contribution income tax credit. The credit is increased by an amount equal to the applicable percentage of employer contributions to an eligible employer plan not to exceed $1,000 per employee. For an employer with more than 50 employees, the credit is reduced by a specified formula. The applicable percentage is 100 percent in the first and second taxable year after the plan is established and reduced to 75 percent in the third year, 50 percent in the fourth year, 25 percent in the fifth year, with no credit available in the sixth year.

The credit is not allowed for an employee who receives wages over $100,000. No deduction is allowed for the portion of qualified startup costs paid or incurred for the taxable year equal to the amount of the credit.

This provision would remove the nonrefundable tax credit (Saver’s Credit) and replace it with a Saver’s Match. Individuals who contribute to a retirement savings plan (other than rollover contributions) would receive a federal match of 50 percent of the employee’s contributions, up to $2,000 per individual. If the match is more than zero but less than $100, the individual would receive a credit against tax. The match would be deposited into the individual’s retirement plan.

The requirements to receive the match remain the same as the existing tax credit, such as a modified adjusted gross income (phase out, available to individuals who are 18 or over, and excludes individuals who are full-time students, or claimed as a dependent on another taxpayer’s return, or individuals who are nonresident aliens.

The match is available with respect to contributions to certain qualified cash or deferred arrangements, or certain annuity contracts that are purchased under a salary reduction agreement. The match is not available for contributions to a Roth IRA.

The provision amends IRC section 403 to allow 403(b) plans to participate in multiple employer plans (MEPs). A 403(b) MEP would not be treated as failing merely because one or more participating employers fail to take actions required for 403(b) plans if the plan otherwise satisfies rules similar to those provided under IRC section 413, regarding employer failures.

The provision also amends the Employee Retirement Income Security Act of 1974 (ERISA) to add 403(b) MEP plans.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC section 403. As a result, the federal relief for multiple employer plans automatically applies under California law.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC sections 401 and 403. As a result, the federal provision to allow de minimis financial incentives automatically applies under California law.

California does not conform to the federal 15 percent excise tax imposed under IRC section 4975 for prohibited transactions.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

The provision adds an additional limitation to the non-recognition treatment under IRC section 1042. This provision allows no more than 10 percent of the amount realized on certain sales of S-Corporation stock to a S-Corporation employee stock ownership plan (ESOP) to be eligible for non-recognition treatment.

The provision also modifies the term “domestic C corporation” to “domestic corporation”.

The provision would create two types of retirement plans for qualified employers with no retirement plan: a starter 401(k) deferral-only arrangement and a safe harbor deferral-only plan.

The starter 401(k) deferral-only arrangement is a cash or deferral arrangement that meets specified automatic deferral requirements, contribution limitations, and notice requirements. These requirements would be considered met if eligible employees are treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation. Employees could opt out of the election.

The safe harbor deferral-only plan has similar requirements as the starter 401(k) deferral-only arrangement for automatic deferral requirements, contribution limitations, and notice requirements.

The special rules for top-heavy plans would not apply to 401(k) deferral-only arrangements or safe-harbor deferral-only plans.

California’s PITL and CTL provides that federal changes to IRC section 401(k), 403(b), and 416 apply without regard to taxable year to the same extent as applicable for federal income tax purposes. In other words, the PITL and CTL automatically conform to federal changes made to IRC section 401(k), 403(b), and 416. As a result, the federal requirement automatically applies under California law.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC section 402A. As a result, the federal provision automatically applies under California law.

California conforms to IRC section 72(t), additional tax on early distributions from qualified plans as applicable for federal purposes for the same taxable year using a rate of 2 ½ percent in lieu of the federal tax rate. (RTC section 17085(c)(1).) Withdrawals from the pension-linked emergency savings account would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

The provision would remove certain barriers of the availability of annuities in qualified plans and IRS under the required distributions test and allow commercial annuities to provide one or more payment types on or after the annuity start date:

• those increased by a constant percentage rate of less than five percent annually,
• those provided as a lump sum payment that meet certain time requirements,
• those that are provided as a dividend or similar distribution as determined by the issuer, or
• As a final payment upon death.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC sections 402, and 414. As a result, the federal provision automatically applies under California law.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC sections 401 and 411. As a result, the federal provision automatically applies under California law.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code. As a result, to the extent the disability retirement payments are not taxable under this Part of the Internal Revenue Code, those federal provisions automatically apply under California law.

However, California conforms, under the PITL, relating to items that are specifically excluded from gross income in RTC section 17131, as of the “specified date” of 1/1/2015. California does not conform to the gross income exclusion for disability retirement payments for first responders and these payments would be taxable.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC section 414. As a result, the federal provision automatically applies under California law.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

The provision allows transfers, rollovers, or distributions from a qualified retirement plan or annuity contract to another qualified retirement plan or annuity contract that are made in equal periodic payments to be exempt from the 10 percent additional tax on early distributions.

Information reporting requirement penalties for failure to file correct information returns and failure to furnish correct payee statements would not be imposed under the following rules:

• if a person makes a return or report regarding the distribution for an annuity plan or retirement plan,
• for the distribution made following a rollover, transfer, or exchange that is exempt from the additional tax on early distributions,
• in making the return or report, the person relies on the certification provided by the taxpayer that the distribution met the early withdrawal exception and exchange requirements, and
• the person does not have knowledge that the distributions do not satisfy those requirements.

California conforms to IRC section 72(t), additional tax on early distributions from qualified plans tax as applicable for federal purposes for the same taxable year using a rate of 2 ½ percent in lieu of the federal tax rate. (RTC section 17085(c)(1).) The equal periodic payment rule for early distributions would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions.

California generally conforms to IRC section 6724 for reasonable cause waiver, definition, and special rules, as of 1/1/2015 with modifications, but does not conform to the modifications made under this section.

Consolidated Appropriations Act, 2023, Repeal of Direct Payment Requirement on Exclusion from Gross Income of Distributions from Governmental Plans for Health and Long-Term Care Insurance

Tax-Favored Withdrawals from Retirement Plans

The Federal law imposes an additional tax on early distributions from qualified retirement plans. The Consolidated Appropriations Act (CAA), 2021 (Section 302) provided an exception to the early withdrawal tax by allowing special disaster-related rules for retirement funds. The CAA, 2021 provisions were temporary, and this federal provision makes some of those rules permanent.

Specifically, the provision waives the 10 percent early withdrawal tax for qualified disaster distributions (QDD), in connection with a federally declared disaster, up to $22,000 from a qualified retirement plan. The distribution is taxed ratably over a three-year period, unless the taxpayer elects otherwise, and may be recontributed within three years, with repayments receiving direct rollover treatment.

A qualified individual is defined as having a principal place of abode at any time during the incident period that is located in a qualified disaster area and has suffered an economic loss as a result of the qualified disaster.

Recontributions of Withdrawals for Home Purchases

This provision allows individuals who received qualified distributions to recontribute those qualified distributions into an eligible retirement plan to which a rollover contribution could be made. The provision also waives the 10 percent early withdrawal tax for such qualified distributions. A qualified distribution must be: (1) a qualified first-time homebuyer distribution; (2) which was used to purchase or construct a principal residence in a qualified disaster area, but which was not used due to the qualified disaster in the area; and (3) must have been received during the period beginning on a date which is 180 days before the first day of the incident period and ending on the date which is 30 days after the last day of the incident period. The repayment period (known as the “applicable period”) runs from the period beginning on the first day of the incident period and ends 180 days after the applicable date with respect to such disaster.

Loans from Qualified Plans

The provision also enables qualified individuals (as described above) to receive retirement plan loans in amounts up to the lesser of $100,000 or the present value of the nonforfeitable accrued benefit of the employee under the plan. Repayment on these loans may be suspended for a period of up to one year if repayment of the loan normally would be due during the period beginning on the first day of the disaster incident period and ending 180 days from the last day of such incident period.

Tax-Favored Withdrawals from Retirement Plans

California conforms to IRC section 72(t), additional tax on early distributions from qualified plans as applicable for federal purposes for the same taxable year using a rate of 2 ½ percent in lieu of the federal tax rate. (RTC section 17085(c)(1).) The qualified disaster distribution would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions.

Recontributions of Withdrawals for Home Purchases

Under RTC sections 17501, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC section 402. Additionally, RTC section 17082 conforms to IRC section 72(t) regarding additional tax on early distributions from qualified plans as applicable for federal purposes for the same taxable year using a rate of 2 ½ percent in lieu of the federal tax rate. Therefore, the federal changes made by this provision with respect to recontribution of withdrawals for home purchases automatically applies under California law.

Loans from Qualified Plans

RTC section 17081 conforms to IRC section 72(p) regarding loans from qualified plans as of the specified date of 1/1/2015, and generally treats loans from a qualified employer plan as a distribution unless specified conditions are met. Therefore, the amendments to IRC section 72(p) for loans from qualified plans would not apply for California purposes.

RTC section 17085(f) conforms to Section 2202(b) of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act), PL 116-136 relating to qualified retirement plan loans from certain retirement plans for coronavirus-related relief.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC section 408. Therefore, the federal changes made by this provision automatically applies under California law.

California conforms to IRC section 72(t)(6), additional tax on early distributions from simple retirement accounts as applicable for federal purposes for the same taxable year using a rate of 6 percent in lieu of the federal tax rate (RTC section 17085(c)(2)). The distributions from simple retirement plans would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC sections 401 and 403. Additionally, under RTC section 17551(c)(1), California automatically conforms to the federal changes made to IRC section 457. Therefore, the federal changes made by this provision automatically applies under California law.

California conforms to IRC section 72(t), additional tax on early distributions from qualified plans as applicable for federal purposes for the same taxable year using a rate of 2 ½ percent in lieu of the federal tax rate. (RTC section 17085(c)(1).) The qualified long-term care distributions would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions.

RTC section 18631(b) provides that a copy of certain federal information returns can be required to be filed with FTB at the time and in the manner as required by forms and instructions. The new federal information return requirement set forth in Section 334 (creating IRC section 6050Z) automatically applies under California law. (RTC section 18631(c)(25))

California generally conforms to IRC sections 6724 for reasonable cause waiver, definition, and special rules, as of 1/1/2015 with modifications, but does not conform to the modifications made under this section.

This provision eliminates the prohibition against a simplified employee pension or a simple retirement account being designated as a Roth IRA.

Rules Relating to Simplified Employee Pensions

The provision specifies that, contributions made pursuant to a simplified employer pension to an individual retirement plan designated as a Roth IRA are included in gross income and distributions are excluded from gross income. This provision provides that an individual retirement plan designated as a Roth IRA will not be treated as a simplified employee pension unless the employee elects to do so.

Rules Relating to Simple Retirement Accounts

This provision provides that an individual retirement plan designated as a Roth IRA will not be treated as a simple retirement account unless the employee elects to do so. Current federal law prohibits a rollover contribution to a Roth IRA unless it is a qualified rollover contribution. In the case of any payment or distribution out of a simple retirement account with respect to the election described above and to which the 25 percent increased early distribution penalty applies, “qualified rollover contribution” only includes a payment or distribution paid into an account from another simple retirement account.

This provision, which applies to pass-through entity contributions, disallows a qualified conservation contribution deduction if the amount of such contribution exceeds 2.5 times the sum of each partner’s relevant basis in such partnership unless the pass-through entity provides a statement on their return that they made the contribution and provides information as required by the Secretary. An exception is provided if after a 3-year holding period and if the contributing partnership’s interests are held by an individual and member of the family of such individual, or if the contributions are to preserve certified historic structures.

Additionally, the provision expands accuracy-related penalties to include underpayment from the disallowance of the deduction explained above, adds reporting requirements, and allows donors the opportunity to amend an easement deed per the published safe harbor deed language. The reasonable cause exception for underpayments will not apply if it is due to the disallowance of the deduction explained above.

Under the PITL, California generally conforms to the federal charitable contribution rules under IRC section 170 as of the specified date of 1/1/2015, and as a result, does not conform to the provisions related to the deduction limitation for qualified contribution made by a pass-through entity or the exception to the holding period.

Under the CTL, California does not conform to IRC section 170, but instead has standalone law that is generally similar to federal law allowing corporations a deduction for charitable contributions. There are no similar CA provisions that disallow contribution deductions that exceed partnership basis. Thus, California would not conform to these provisions under the CTL.

Under the Administration of Franchise and Income Tax Law, California has modified conformity to IRC 6662, as it existed as of the specified date of 1/1/2015. California does not conform to the changes related to the accuracy-related penalty.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC section 420. Therefore, the federal changes made by this provision automatically applies under California law.

ERISA Preemption

Additionally, federal ERISA sections specifically preempt state laws relating to certain employee benefit plans in California.

California does not conform to the advanced manufacturing investment credit.

California law conforms, under the Corporation Tax Law (CTL), to the federal AMT as of the “specified date” of 1/1/2015, with modifications, but California does not conform to the changes made to corporate AMT by this section.

Additionally, California does not conform to the changes made by this section to rules and adjustments related to net operating losses and credits, etc.

FTB does not administer excise taxes.

California does not conform to IRC 36B, relating to refundable credits for qualified health plan under the Affordable Care Act, nor to Subtitle K, Group Health Plan Requirements, of the IRC.

California has a standalone program providing a California Premium Assistance Subsidy (PAS) to applicable return filers that use the IRC section 36B eligibility requirements, with modifications. The California PAS provides financial assistance to pay the premiums for a qualified health plan through the California health insurance marketplace. This federal change does not impact the California PAS program. However, the extension of the increased federal PTC for these taxable years keeps the California PAS amount at zero for taxable years beginning before January 1, 2026.

California does not conform to the renewable electricity production credit.

• Qualified Fuel Cell
• Solar Energy
• Equipment used to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting use to heat a swimming pool.
• Geothermal
• Equipment used to produce, distribute, or use energy derived from a geothermal deposit used to generate power up to the electrical transmission stage.
• Fiber-Optic Solar
• Equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight or electrochromic glass which uses electricity to change its light transmittance properties in order to heat or cool a structure.
• Qualified Small Wind Energy
• Waste Energy Recovery
• Energy storage technology
• Qualified biogas property
• Microgrid controllers
• Combined Heat and Power System
• Thermal Energy Property

California does not conform to the federal energy credit.

California does not conform to the federal energy credit.

California does not conform to the carbon oxide sequestration credit.

California does not conform to the zero-emission nuclear power production credit.

• Biodiesel and renewable diesel
• Biodiesel mixture
• Alternative fuel
• Alternative fuel mixture

California does not conform to these credits. Additionally, FTB does not administer excise taxes.

California does not conform to the second generation biofuel producer credit.

California does not conform to the sustainable aviation fuel credit. Additionally, FTB does not administer excise taxes.

California does not conform to the clean hydrogen production credit, renewable electricity production credit, federal energy credit, or the hydrogen excise tax credit.

California does not conform to the energy efficient home improvement credit.

• 26 percent for property placed in service after 12/31/2019 and before 1/1/2022
• 30 percent for property placed in service in after 12/31/2021 and before 1/1/2033
• 26 percent for property placed in service after 12/31/2032 and before 1/1/2034
• 22 percent for property placed in service after 12/31/2033 and before 1/1/2035

California does not conform to the residential clean energy credit.

This provision is not applicable under California Law.

Under the PITL, California specifically does not conform to the federal deduction for energy efficient commercial buildings, and the deduction has not been incorporated under the CTL.

California law conforms, under the Corporation Tax Law (CTL), to federal rules related to corporate distributions and adjustments under IRC section 312, as of 1/1/2015. However, California does not conform to the federal changes under the Inflation Reduction Act that allows the IRC 179D deduction in computing the earnings and profits of a REIT corporation.

California does not conform to the new energy efficient home credit.

California does not conform to the clean vehicle credit.

California does not conform to the credit for previously-owned clean vehicles.

California does not conform to the commercial clean vehicles credit.

California does not conform to the alternative fuel vehicle refueling property credit.

California does not conform to the advanced energy project credit.

California does not conform to the advanced manufacturing production credit.

FTB does not administer an excise tax or the laws related to this section.

California does not conform to the clean electricity production credit.

California does not conform to the clean electricity investment credit.

The PITL, generally conforms to the Modified Accelerated Recovery System (MACRS) in IRC section 168 as of a specified date of 1/1/2015, with modifications, but does not conform to this provision.

Under the CTL, California does not conform to federal MACRS depreciation. Instead, the CTL is generally in substantial conformity to the pre-1981 federal asset depreciation range (ADR) rules, which generally allow property to be depreciated based on its useful life. The CTL does not conform to this provision.