Overview of insurance provisions in Ways and Means tax reform bill
Authored by Carrie Small
There are several key provisions that could significantly impact the insurance industry in the House of Representatives’ initial tax reform bill draft, the Tax Cuts and Jobs Act (TCJA) released on Nov. 2, 2017. It is important to remember that there could be modifications to these provisions before, and if, signed into law. While the bill is currently undergoing markup by the Ways and Means Committee, Speaker Paul Ryan indicated he expects the full House to hold a vote on the bill the week of Nov. 13. If the bill passes, it would head to the Senate where the Senate Finance Committee is currently drafting its own tax reform bill. The ultimate goal of Republican congressional leadership is to pass a bill for the president’s signature by the holidays.
Following is a summary of the major insurance provisions included in the TCJA that would generally be effective for tax years beginning after 2017.
Modify net operating losses of life insurance companies
This provision would allow life insurance companies to carry net operating losses (NOL) back up to two tax years or forward up to 20 tax years, whereas most companies would no longer be eligible to carry losses back, but would have an indefinite carryforward. The TCJA would also limit the use of an NOL for all taxpayers (including life insurance companies) to offset up to 90 percent of a year’s taxable income determined before any NOL. It should be noted that while the Ways and Means Committee explanation reflects the intent to change current law for the two-year carryback and 20-year carry forward for life insurance companies, the actual draft bill does not include language codifying such a change. Presumably this will be corrected during markup of the bill.
Repeal of small life insurance company deduction
This provision is said to eliminate a tax subsidy for the insurance industry that is not available to similar businesses in other industries. It also removes a tax preference that is provided to the segment of the insurance industry in which the risk distribution benefits of pooling are seen to be the weakest.
Computation of life insurance tax reserves
Under this provision, life insurance companies would take into account a specific percentage, 76.5 percent, of the increase or decrease in reserves for future un-accrued claims (as reported on the insurer’s regulatory annual statement and on tax Schedule M-3) in computing taxable income. Deficiency reserves, asset adequacy reserves or other types of reserves would not be included. The effect of this provision would be taken into account ratably over the succeeding eight tax years.
Adjustment for change in computing reserves
This provision would repeal the section 807(f) 10-year period for adjustments to take into account changes in a life insurance company’s basis for computing reserves. Instead, the general rule for making tax accounting method adjustments would apply to changes in computing reserves by life insurance companies (i.e., in the tax year during which the accounting method change occurs for an adjustment that reduces taxable income, or over four tax years for an adjustment that increases taxable income).
Modify rules for life insurance proration for purposes of determining the dividends received deduction (DRD)
This provision would change the life insurance company proration rules for the DRD by making the company share 40 percent.
Repeal special rule for distributions to shareholders from pre-1984 policyholders’ surplus accounts
The rules for policyholders’ surplus accounts would be repealed and any remaining balances would be subject to tax, payable in eight annual installments.
Modify proration rules for property and casualty insurance companies
The 15 percent reduction in the reserve deduction for property and casualty (P&C) insurance companies would be increased to 26.25 percent. This would keep the reduction in the reserve deduction consistent with current law by adjusting the rate proportionately to the decrease in the corporate tax rate.
Modify discounting rules for property and casualty insurance companies
Under this provision, P&C insurance companies would use the corporate bond yield curve (as specified by the U.S. Department of the Treasury) to discount the amount of unpaid losses rather than mid-term applicable Federal rates. In addition, the special rule that extends the loss payment pattern period for long-tail lines of business would be applied similarly to all lines of business. The provision also would repeal the election to use company-specific, rather than industry-wide, historical loss payment patterns. There would be a transition rule that would spread adjustments relating to pre-effective date losses and expenses over such tax year and the succeeding seven tax years.
Repeal of special estimated tax payments
This provision would repeal the elective deduction and related special estimated tax payment rules under section 847. Under current law, insurance companies may elect to claim a deduction equal to the difference between the amount of reserves computed on a discounted basis and the amount computed on an undiscounted basis. Companies that make this election are required to make a special estimated tax payment equal to the tax benefit attributable to the deduction.
Capitalize certain policy acquisition expenses (DAC)
This proposal would substantially increase the capitalization rates applicable to specified insurance contracts under section 848. It would also replace the current three categories of contracts with only two categories: group contracts (4 percent) and all other specified contracts (11 percent).
In addition, there are a few international provisions that could have a significant impact on insurance companies.
- 20 percent excise tax on payments to foreign affiliates.
Domestic corporations would be subject to a 20 percent tax in making certain deductible payments to a foreign affiliate, unless the affiliated foreign corporation elected to treat the payments as effectively connected income. It is presumed that reinsurance transactions with foreign affiliates would be subject to these rules.
- Restriction on insurance business exception to passive foreign investment company (PFIC) rules.
The PFIC exception for insurance companies would be amended to apply only if the foreign corporation would be taxed as an insurance company were it a U.S. corporation and if loss and loss adjustment expenses, unearned premiums, and certain reserves constitute more than 25 percent of the foreign corporation’s total assets (or 10 percent if the corporation is predominantly engaged in an insurance business and the reason for the percentage falling below 25 percent is solely due to temporary circumstances).
What to do now
Each organization will be impacted differently depending on its unique situation. We recommend you speak with your tax advisor now, and as the tax reform bill moves through the legislative process, stay appraised of changes that will impact your tax planning. Our specialized insurance tax team will continue to cover the bill’s progress and are available to discuss your situation. Access more information to help you understand the changes in our tax reform resource center.