2020 SALT Developments for Insurers
The general consensus is 2020 was a chaotic year that most people would rather forget. Unfortunately, those of us who deal with taxes have to address the lingering calendar-year 2020 developments and effects as we go through the 2021 tax filing process.
COVID-19 became the overwhelming focus for the year in all aspects of our lives, and that also was true in terms of tax developments. The effects of the pandemic on state tax created unique issues for the insurance industry. As insurance companies generally have minimal state income and sales tax liabilities, provisions adjusted or extended for these taxes respectively did not have significant effects on the industry. However, tax issues related to employees working remotely have been as significant on insurance companies as they have been for other industries. Pandemic-related complications from remote employees have the potential to create a madding trifecta of state tax issues—nexus exposure, payroll withholding, and individual income tax filing requirements. See our recent BKD Thoughtware® article, Nomads Can Make You Go Mad – Tax Insights for Remote Workers, for more details on these problems.
COVID-19 also created a unique tax and accounting issue related to the insurance industry tax and policyholder relief. Insurance companies found themselves with potential underwriting windfalls on automobile underwriting as policyholders under stay-at-home orders drove less and respective claim costs decreased. In an unprecedented industrywide response, most insurers opted to provide relief to their policyholders. The method used to implement the relief varied by insurer, but the primary methods used were a premium refund or credit treated as a reduction to premium or as an additional underwriting expense, a policyholder dividend, or a future rate reduction. The National Association of Insurance Commissioners (NAIC) provided late guidance (Interpretation 20-08) on the proper statutory accounting treatment for the various relief methods, but very little guidance has yet been provided by the NAIC or state taxing jurisdictions on the respective premium tax effect due to the relief. This leaves much uncertainty for insurers who chose to provide policyholder relief under the refund/credit method on whether any tax reduction will be permitted for their 2020 premium tax returns due in just a few months.
COVID-19 also cast its dark shadow on other tax developments during the year. As state legislators, administrators, and judicial bodies also were under stay-at-home orders or concentrating on virus-related matters, many other tax matters were placed on order, often permanently. Here are some highlights from 2020 for state tax matters affecting insurers that did transpire.
- Probably the largest non-COVID-19 tax item of 2020 (for all taxpayers) is the implementation of the Oregon Corporate Activity Tax (CAT) as of January 1, 2020, per Oregon H.B. 3427, Laws 2019. The tax is $250 plus 0.57 percent of a taxpayer’s taxable business receipts above $1 million. Registration is required once commercial activity exceeds $750,000, and quarterly payments for 2020 are due when the annual tax liability for the tax year is estimated to exceed $10,000. The tax is filed under a full combined unitary group basis. While the Oregon Department of Revenue has issued several regulations providing additional guidance for the CAT, specific guidance pertaining to insurance companies is still pending release.
- Georgia, Minnesota, Mississippi, Pennsylvania, and South Carolina updated their life and health guaranty fund provisions to conform to NAIC model statutes, which generally include health maintenance organizations as member insurers and split assessments pertaining to long-term care insolvencies 50-50 between life/annuity and health insurers.
- Florida reduced its surplus lines tax rate to 4.94 percent.
- Maine updated its fire risk percentages by line of business for purposes of its fire investigation and prevention tax.
- Michigan decreased the premium tax rate on qualified health plans to 0.8863 percent.
- Michigan also passed legislation to treat travel insurance as inland marine coverage for purposes of financial reporting and premium taxation.
- Ohio authorized a nonrefundable premium tax credit for capital contributions to the construction of transformational mixed-use development properties.
- Puerto Rico imposed a new 3 percent fire tax on Fire (LOB 1.0) and Allied Lines (LOB 2.1) coverage.
- Utah clarified its “in lieu of” provision is in place of other licenses but is not an exemption from sales, use, or excise taxes.
- Wyoming exempted the portion of life insurance policy premium in excess of $100,000 from retaliatory tax and reduced the premium tax rate on such premium to 0.075 percent.
- Maryland and New Jersey passed legislation allowing pass-through entities to elect to be taxed at the entity level. As the credit mechanism for this tax is only effective against income tax, it can create potential tax increases for insurers who pay premium tax in these states.
As we have seen trending over the past several years, many states imposed or increased assessments on insurers (especially health insurers) rather than an actual tax.
- Colorado established the Health Insurance Affordability Enterprise assessment of 1.15 percent of premium for nonprofits and 2.1 percent of premium for for-profit health insurers.
- Missouri created the Automobile Insurance Plan to provide uninsured motorist coverage, which includes funding through market share assessments on member insurers writing auto coverage in the state.
- New Jersey created the Health Insurance Affordability Fund to increase affordability for individual health insurance in the state for low-income households, funded through a 2.75 percent assessment on net written premium earned in the state on health benefits plans.
- Oregon increased the workers’ compensation premium assessment rate to 9 percent for 2021.
- Virginia created the Health Benefit Exchange, funded by a 3 percent assessment on health insurers.
- Washington established a new fraud assessment imposed on all licensed insurers to cover program costs involved by the department of insurance, not to exceed 0.01 percent of premium.
To learn more about these developments and how they could affect your organization or for assistance with any of these new provisions, contact your BKD Trusted Advisor™ or submit the Contact Us form below.