A new federal tax ruling could help cut income taxes at group insurers that use premium stabilization reserves.[@@]
The ruling applies to carriers that write group insurance contracts, such as group health contracts, but are not life insurers.
Some of those companies have arrangements to give some premiums back to customers, such as non-life group health customers, that do a good job of holding claims down. Instead of paying the premiums back to the experience-rated customers directly, the carriers put the cash in premium stabilization reserves, in funds earmarked for specific policyholders.
When carriers are computing taxable insurance premium revenue, they can treat additions to premium stabilization reserves as return premiums, Sheryl Flum, an IRS financial institutions and products specialist, writes in IRS Revenue Ruling 2005-33.
The ruling means that affected insurers may be able to deduct stabilization reserve additions from their gross written premiums when calculating the taxes due under Section 831(a) of the Internal Revenue Code.
The reserve additions qualify for that treatment, under Section 1.832-4(a)(6)(i) of the Income Tax Regulations, because “the amounts were previously included in [the insurance company's] gross premiums written,” Flum writes. “They do not depend on the experience of [the insurance company] or the discretion of [the insurance company's] management.”
Moreover, at some point, the insurance company must either pay the money in the reserves back to the customer, when the customer cancels the insurance policy, or the insurance company must use the money to pay future premiums, Flum writes.
Flum notes that insurers do have to include stabilization reserve flows in their taxable gross written premium revenue when cash flows out of the reserves to pay for coverage.
The IRS has posted the revenue ruling on the Web at http://www.irs.gov/pub/irs-drop/rr-05-33.pdf