1. AICP E Day The 2017 Tax Act – Much Change, but Little Reform Lower Rates & Changes to special insurance provisions: What does it mean for Insurers?
June 6, 2018
Sturbridge, MA
Walter C. Welsh
University of Connecticut School of Law
Walter C. Welsh
University of Connecticut School of Law

2. 2017 Tax Act or Tax Cut & Jobs Act
Goals of Tax Reform
Lower Rates
Simplification
Additional Revenue
Elimination or Reduction of Tax Expenditures or deductions
Closing loopholes
Walter C. Welsh
University of Connecticut School of Law

3. Joint Tax Committee -Tax Expenditures - Examples
Tax Expenditure Estimated Cost (billions)
1. Health Care Exclusion $ 659
2. Home Mortgage Deduction $ 484
3. State & local sales & Property Tax Deduction $ 237
4. Exclusion of invest. Inc. on life & annuity contracts $ 149
5. Special treatment of life insurance reserves $ 12.2
6. Proration for property & casualty tax exempts $ 1.8
7. Discounting Property & casualty reserves $ 34
Joint Committee on Taxation “Estimates of Federal Tax Expenditures for Fiscal Years ,” December 15, 2010
Walter C. Welsh
University of Connecticut School of Law

4. Tax reform: focus on expenditures = focus on Insurers
Special Code provisions for Insurance companies identified as expenditures
Tax treatment of insurance contracts called expenditures
Walter C. Welsh
University of Connecticut School of Law

5. Contracts and Tax Treatment
Contracts, Life Insurance, Annuity, Disability Income Insurance, Long-Term Care, Health
Unique Features – protection against risk
Tax treatment/consequences depends on nature of the contract
Walter C. Welsh
University of Connecticut School of Law

6. Contracts and Tax Treatment
No income and no tax until owner sells or exchanges the contract OR
Upon distribution from the insurance contract
There are special tax rules for disability income insurance and long term care insurance
Walter C. Welsh
University of Connecticut School of Law

7. 2017 Tax Act- No Change to the Tax Treatment of Contracts & Retirement Plans
The Act did not change the tax treatment for the owners, individuals and corporations, of insurance and annuity contracts
These contracts include: life insurance, annuities, disability income insurance and long term care insurance
The Act also did not change the tax treatment of retirement plans
Walter C. Welsh
University of Connecticut School of Law

8. 2017 Tax Act Lower Rates and Revised Deductions & Exclusions
Corporate Tax Changes
Individual Tax Changes
Rate 35% %
Permanent
Rates 10% to 39.6%
10% to 37%
2018 to 2025
Deductions – examples
Interest deduction limit
Insurance Cos new limits
Reserves
Dividends Rec’d., T.E.I.
Acquisition expenses
Deductions - examples
State & Local Taxes Cap at 10,000
Mortgage interest on debt up to 750,000
No Misc. Deductions
Walter C. Welsh
University of Connecticut School of Law

9. 2017 Tax Act Lower Rates and Revised Deductions & Exclusions
Corporate Tax Changes
Individual Tax Changes
Rate 35% %
Permanent
Rates 10% to 39.6%
10% to 37%
2018 to 2025
Deductions – examples
Interest deduction limit
Insurance Cos new limits
Reserves
Dividends Rec’d., T.E.I.
Acquisition expenses
Pers. exem. 4,050 to 0
Std. Ded. 6,500 to 12,000
Walter C. Welsh
University of Connecticut School of Law

10. Lower Rates, Revised Deductions & Exclusions for Individuals
Example H&W Approx. Pre w/ std ded Gr. Inc. $150, , ,000 Less Per ex 8, St & loc. 25, , Other 5,000 5,000 0 STD ded ,000 Tax. Inc. 111, , ,000 Marginal rate 25% 22% 22%
Walter C. Welsh
University of Connecticut School of Law

11. Estate Tax Exclusions Estate tax Exclusion per Individual 5,490,000
11,180,000
Indexed for inflation ,490,000 Indexed
Walter C. Welsh
University of Connecticut School of Law

12. Lower Rates, Revised Deductions & Exclusions for Corporations
2017 Tax Act Rate – 21%, No Alternative Min. Tax Limit on Interest expense deduction Sum of business interest + 30% of adjusted taxable income Limits on deductions for Meals & Entertainment Entertainment – not deductible Employee meals on premises & cafeteria subsidies 50 % deductible Transit subsidies (Pre tax) not deductible
Walter C. Welsh
University of Connecticut School of Law

13. Lower Rates, Revised Deductions & Exclusions for Corporations
2017 Tax Act Executive Compensation Limit of $1K on deduction for Executive Comp. Performance-based exception repealed, includes CFO Full immediate deduction for cost of certain business assets. The 100% deduction is gradually eliminated from 2022 to 2026
Walter C. Welsh
University of Connecticut School of Law

14. Insurance Company Income NAIC Annual Statement
LIFE
Property Casualty
Health
Walter C. Welsh
University of Connecticut School of Law

15. Insurance Company Income NAIC Annual Statement
+ Premiums
+ Investment Income
- Commissions – Acquisition Expenses
Losses Paid
Change in reserves
= Income
Internal Rev. Code starts with NAIC Annual statement
Walter C. Welsh
University of Connecticut School of Law

16. Insurance Company Taxation Special Provisions
Reserves
Acquisition
Expenses
Proration
Walter C. Welsh
University of Connecticut School of Law

17. Deferred Acquisition Cost (“DAC”) Tax – Life Companies
Pre 2018 Law:
Deduction of actual expenses incurred
Capitalization - proxy amount of expenses:
1.75% of net premiums – annuity
2.05% of net premiums on group life
7.7% of net premiums on all other types
Pension plan contracts excluded
Amortized for 120 months – 10 years
2017 Tax Act:
2.1% of net premiums – annuity
2.46% of net premiums on group life
9.24% of net premiums on all other types
Amortized for 180 months – 15 years
Walter C. Welsh
University of Connecticut School of Law

18. Acquisition Costs Non– Life Companies
Pre– 2018 Law:
Deduction of actual acquisition expenses incurred
Deduction of only 80% of the increase in the unearned premium reserve UPR
2017 Tax Act:
No Change
Deduction of acquisition expenses incurred
Deduction of 80% of the change in UPR
Walter C. Welsh
University of Connecticut School of Law

19. Life Co. Reserve Computations
Pre Law:
Life insurance companies deduct increases in life insurance reserves
Reserves determined by interest rates and mortality assumptions or by principles – PBR
The greater of net surrender value and the reserve determined by NAIC method
Using as the interest rate, the greater of the applicable Federal interest rate
or the prevailing State assumed interest rate 
No higher than NAIC (statutory) reserve
Walter C. Welsh
University of Connecticut School of Law

20. Life Reserve Computations
2017 Tax Act:
The tax reserve is the greater of
Net surrender value or
92.81% of the NAIC reserve
Cannot exceed NAIC reserve
Transition Rule. For 2018, compute year-end reserves under 2018 rules and spread the difference over 8 years
Walter C. Welsh
University of Connecticut School of Law

21. Non-Life Company Reserves
Pre Law:
Non- Life insurance companies deduct increases in discounted unpaid losses
The discount rate is the applicable Federal mid - term rate
The loss payment pattern is a pattern determined by the Treasury or,
By election, the company can choose its own historical pattern
For certain long tail line the payout period is 10 years
Walter C. Welsh
University of Connecticut School of Law

22. Non-Life Company Reserves
2017 Tax Act:
Deduction of increases in discounted unpaid losses
The discount rate is based on the corporate bond yield curve – generally higher than the risk – free Federal rate. Maturity level not yet defined
The loss payment pattern is a pattern determined by the Treasury and ,
The company may not use its own historical pattern
For certain long tail lines the payout period is extended from 10 to 24 years
Transition Rule. 8 years – same as for life Cos
Walter C. Welsh
University of Connecticut School of Law

23. DRD & Tax Exempt Interest – Proration - Life Companies
Pre 2018 Law:
Corporations can deduct some portion of the dividends they receive on stock they own in other corporations – generally 70%
Corporations can generally exclude tax exempt interest
For life insurance companies, only the “company’s share” (and not the “policyholders’ share”) of dividends received is deductible and only the company’s share of tax exempt income is excludable
The company’s share is determined under complex “proration” rules
Walter C. Welsh
University of Connecticut School of Law

24. DRD & Tax Exempt Interest – Proration - Life Companies
2017 Tax Act:
Corporations can deduct some portion of the dividends they receive on stock they own in other corporations– under new law generally 50%
Corporations can generally exclude tax exempt interest
For life insurance companies, the Company Share is a fixed percentage at 70%
DRD is essentially 35%
Walter C. Welsh
University of Connecticut School of Law

25. DRD & Tax Exempt Interest – Proration – Non - Life Companies
Pre 2018 Law:
Corporations can deduct some portion of the dividends they receive on stock they own in other corporations – generally 70%
Corporations can generally exclude tax exempt interest
For other insurance companies (non– life) only the deduction for losses incurred is reduced by 15% of tax-exempt income and by 15% of the dividends received deduction
Walter C. Welsh
University of Connecticut School of Law

26. DRD & Tax Exempt Interest – Proration – Non - Life Companies
2017 Tax Act:
For other insurance companies (non– life), the deduction for losses incurred is reduced by 25% of tax-exempt income and 25% of the dividends received deduction.
The increase from 15% to 25% offsets the some of the benefit of the reduction in the corporate tax rate from 35% to 21%. (.35 x 15 = 5.25, .21 x 25 = 5.25)
Walter C. Welsh
University of Connecticut School of Law

27. Change in Method of Computing Reserves - Life Companies
Pre– 2018 Law:
Changes in reserves due to strengthening or weakening taken into account over a 10 year period
2017 Tax Act:
Changes in method or basis of computing reserves treated as a change in method of accounting
4 year period for additions to income
1 year period for deductions from income
Walter C. Welsh
University of Connecticut School of Law

28. Net Operating Losses Pre– 2018 Law:
NOLs could be carried back 2 years and forward 20 years and offset 100% of taxable income
Life Insurance Companies subject to special rule carry back 3 and forward 15
2017 Tax Act:
NOLs for cannot be carried back and can be carried forward indefinitely
NOLs can only offset 80% of taxable income
Non–Life Companies carried back 2 and forward 20 and offset 100% of taxable income
Walter C. Welsh
University of Connecticut School of Law

29. Special Deduction for Small life Insurance Companies
Pre– 2018 Law:
Life companies with assets of < $500,000 entitled to deduct up tp 60% of the first $3,000,000 of taxable income
2017 Tax Act:
The small life company deduction is repealed
Walter C. Welsh
University of Connecticut School of Law

30. International Tax Provisions
Pre–2018 Law
US taxed world-wide income of a business
Income of US-owned foreign subsidiary Not taxed, however,
Subpart F could apply to impose tax on some portion of income foreign corporation owned by US shareholder
Walter C. Welsh
University of Connecticut School of Law

31. 2017 Tax Act - International
US imposes income tax on a territorial basis – on income earned in the US
Special provisions have world-wide affect
GILTI Global Intangible Low-Taxed Income
FDII foreign derived intangible income
BEAT base erosion and anti abuse tax
Walter C. Welsh
University of Connecticut School of Law