Calif. Orders Premium Tax On WC Deductibles

The notice continues that insurers writing such policies should be advised "that deductible amounts received from insured employers are considered 'gross premiums' and are subject to premium taxation during the tax year in which the amounts are paid."

Scott Edelen, deputy insurance commissioner, communications, for the department in Sacramento, explained that the distinction in California law is that insurers are liable for all benefits paid to employees, regardless of whether the source of some of the payments is an employer's self-insured deductible.

Insurers pay all claims and at the end of the year, Mr. Edelen explained, they are reimbursed the deductible by the employer. This is the amount that is being taxed, he said.

He estimated that assessments for 1997 alone total about $8.3 million. Further estimates for other tax years are not yet available, he said.

The notice also reads that the department will be "ascertaining the deductible amounts previously received for tax years 1997-2000 for the purpose of proposing additional premium tax assessments to the California State Board of Equalization."

In an e-mail, Mr. Edelen explained that the Legal and Financial Surveillance divisions of the department "brought the issue forward on Feb. 4, 2002, that the premium taxes on deductibles were not being assessed."

He continued that, "We have notified companies of this oversight and have corrected the oversight. The CDI believes it is fairly enforcing the revenue laws of the State."

Stephen Broadie, assistant vice president, financial legislation and regulation for the Des Plaines, Ill.-based National Association of Independent Insurers said that, "It's clear that for statistical accounting purposes these aren't premiums."

The departments move, he said, "will presumably be significant to any workers' compensation insurer that writes high-deductible policies in California."

The notice, he explained, would require insurers to pay higher premium taxes (2.35 percent multiplied by the deductible amounts reimbursed to the insurers). In the long run this would likely increase the cost of workers' comp insurance to California employers, he said.

The Washington-based American Insurance Association called the decision "incomprehensible." Mark Webb, AIA vice president, Western region, said in a statement: "This program has been in place since 1995 and the Department's prior decisions have never indicated that these payments were taxable premiums. Until yesterday no one thought these deductibles were subject to taxation."

Mr. Webb continued that, "The California Board of Equalization has never defined these deductibles as taxable. This decision is an abuse of the process because the department has acted without any public input or oversight by the Administrative Procedures Act."

The timing of the decision, he said, "is profound. Seeking taxes retroactively to 1997 will further burden insurers and employers who are already struggling to deal with the permanent benefit increases contained in [workers' comp reform legislation signed into law last month]."

Nicole Mahrt, vice president, state affairs, for the AIA in Sacramento, said that "this is huge. As of yesterday no one thought this was subject to taxation."

Ms. Mahrt continued that large employers might exercise their option to self-insure because "it might make more sense for them to stop using private insurers."