WASHINGTON (July 25, 2005)—Rep. Jim Nussle, R-Iowa, introduced legislation Wednesday that would amend the Internal Revenue Code of 1986 to enhance tax incentives for small property/casualty insurance companies.
The National Association of Mutual Insurance Companies (NAMIC) supports the legislation.
H.R. 3360 would clarify the definition of gross receipts for purposes of determining the tax exemption status for small property/casualty insurance companies under Section 501(c)(15) of the Internal Revenue Code. The legislation would also increase the investment income election threshold under Section 831(b) of the Internal Revenue Code from the current $1.2 million to $1.971 million and provide for annual indexation.
The Pension Funding Equity Act of 2004 (“2004 Act”) amended section 501(c)(15) to base qualification for the exemption for small non-life insurance companies on a ceiling amount of “gross receipts,” rather than net written premiums as it had been since the Tax Reform Act of 1986 (“pre-2004 law”). The purpose of this change was to prevent investment companies, which wrote a minimal amount of insurance but had disproportionately high capital and surplus and investment income, from qualifying for tax exemption on all their income because they were under the net premium ceiling. As amended, the exemption applies only to non-life insurance companies with “gross receipts” for the taxable year that do not exceed $600,000, if premiums make up more than 50 percent of gross receipts. A mutual non-life insurance company also may be exempt if its premiums make up more than 35 percent of its gross receipts and its gross receipts do not exceed $150,000.
“NAMIC was pleased that the Congress preserved the Section 501(c)(15) and shut down the abuses that were taking place. Unfortunately, the amendment did not provide a definition of the term ‘gross receipts,’ and there is no uniform definition in the Code,” said David A. Winston, Senior Vice President Federal Affairs.
“Without further definition, there are many unanswered questions that companies are facing with respect to determining whether a small property/casualty insurance company would qualify for the exemption,” said Winston.
According to Winston, “Under H.R. 3360, the new definition will be very similar to the standard that was used prior to the changes enacted as part of the 1986 tax reform laws.”
Currently, under Section 831(b), certain small property/casualty insurance companies may elect to be taxed only on investment income. This election can be made if the greater of net or direct written premiums for the taxable year exceed $350,000, but do not exceed $1,200,000. The election level was last set in 1986.
“Since the provision was never indexed for annual inflation, this amount has remained the same since 1986, thus stifling the growth of small property/casualty companies that provide valuable and affordable services for their customers,” said Winston.
“Because small, mutual property/casualty insurance companies have such limited financial resources, all of their assets must be preserved for claims paying to ensure their important niche market in America. This significant piece of legislation will go a long way in helping many of the small property/casualty insurance companies throughout the country.”