NU Online News Service, July 28, 3:37 p.m. EDT

WASHINGTON–Bipartisan legislation has been introduced in the House that would limit the tax exposure of very small property and casualty insurance companies.

The bill (H.R. 3301) sponsored by Rep. Earl Pomeroy, D-N.D., and Paul Ryan, R-Wis., would amend Section 831(b) of the Internal Revenue Code and tie tax increases to an annual cost of living adjustment.

Marliss McManus, senior federal affairs director at the National Association of Mutual Insurance Companies, said under current tax regulations, only when a company goes over a $1.2 million threshold does it becomes fully taxable.

The legislation proposed would raise the alternative tax liability limitation for small insurers to $2.025 million from $1.2 million. The limit has not been raised since 1986.

Under its provisions small p&c insurers with direct or net written annual premiums not exceeding $1.2 million would be taxed only on their net investment income.

If the firm is under the $1.2 million threshold, the company can elect to be taxed on its net investment income as compared to being fully taxable, said Ms. McManus.

The change provided by the proposed legislation will also provide small insurers with more options because they would have the flexibility of still being fully taxable as well as the option to be taxed on their net investment income, she said.

Investment income is taxed as any income for that particular earnings bracket, with 15 percent the base rate, she said.

She explained that some companies may choose not to be taxed on their investment income even though they have that option "because their stability and the amount of investment earnings is such that they would pay a lot more on their investment income than if paying taxes on their operations."

The increase would allow them to have the necessary capital available to pay claims when needed, she said.

Rep. Pomeroy and Rep. Ryan introduced similar legislation in the last Congress. A bill was also introduced in the Senate last year by Reps. Blanche Lincoln, D-Ark., and Christopher S. Bond, R-Mo.

Ms. McManus said, "Small mutual property and casualty insurance companies serve a very important niche market in the United States and are approaching the $1.2 million limit."

She explained that "both the companies and their customers will be adversely impacted if the election level is not increased."

"If the election level is increased and tied to an annual cost-of-living adjustment, then these insurers can continue to keep premiums low and serve areas where affordable insurance might otherwise not be available," said Ms. McManus.

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House Bill Introduced To Limit Tax Bite On Small Insurers

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