Illinois Governor Bruce Rauner has until August 28 to sign or veto Senate Bill 1737, a proposed new law that would reform the Illinois Insurance Code’s regulatory framework for captive insurance companies and significantly drop the state’s current premium tax rate on self-procured insurance.
If enacted, this new law would provide a substantially improved environment for Illinois-based companies looking for captive solutions.
Members of the Illinois General Assembly continue to make efforts to ameliorate the impact of Illinois’ new self-procurement tax on captive insurance. On March 10, 2015, Sen. William Haine (D-Alton) filed an amendment to Senate Bill 1573, which was originally introduced under his sponsorship on February 20, 2015, and is now pending in the Senate Insurance Committee. As originally presented, the Bill would basically undo last year’s legislation (P.A. 98-978) imposing a self-procurement tax and narrowing the industrial insured exemption. The amendment takes a more nuanced approach, by carving out captive insurance arrangements from the tax while leaving the narrowed definition of industrial insured in place.
The amendment proposes to amend the law to simply provide that contracts of insurance with a captive insurance company are not subject to the taxes and fee (3.5 percent self-procurement tax, 0 percent to 1 percent fire marshal tax, 0.1 percent surplus lines association fee) imposed by Public Act 98-978. The amendment defines a “captive insurance company” broadly to include “any affiliated insurance company … or special purpose financial captive insurance company formed to insure the operational risks of the company’s parent or affiliates, risks of a controlled unaffiliated business, or other risks approved by the captive insurance company’s board or other regulatory body.” The definition also enumerates several kinds of captive insurance companies as specifically included.
This proposed exemption for insurance placed directly with captive insurance companies would leave unaffected the increased qualification requirements to be an “industrial insured” eligible to self-procure insurance from unadmitted carriers. Insurance directly procured from a nonadmitted commercial carrier would continue to be subject to tax. The amendment also changes the effective date of the Act to January 1, 2016, whereas previously the bill would have been effective immediately upon becoming law. Insurance transacted with a qualifying captive in 2015 thus would be subject to tax under the amendment.
On March 10, 2015, House Minority Republican Leader Jim Durkin introduced House Bill 4193, which mirrors Senate Bill 1573 (as originally filed) in basically repealing the changes made last year by Public Act 98-978.
It remains to be seen whether either version of the Bill will gain traction in the Democratic-controlled General Assembly, which is struggling with a large state budget deficit that will increase substantially with the 2015 rollback of Illinois’ temporary income tax increase.
On February 20, 2015, Sen. William Haine introduced Senate Bill 1573, which would repeal the self-procurement tax that came into effect January 1, 2015. As we have previously covered in detail, at the end of its 2014 regular legislative session,the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements (P.A. 98-978). The bill had been passed by the General Assembly under the guise of technical corrections to the insurance code and went widely unnoticed throughout the legislative process. Governor Quinn signed it into law, and efforts to repeal the law during the veto session were unavailing. The new tax is currently in effect and applies to policies effective on or after January 1, 2015. Reports, due 90 days after the effective date of coverage, will begin coming due at the beginning of April, with taxes and fees due 30 days after reports are filed.
Now, with a new General Assembly and a new governor, efforts again are underway to repeal the tax. Senate Bill 1573 would reverse the changes made last year by Public Act 98-978 by repealing the self-procurement tax. In addition, the Bill restores a broader industrial insured exception to permit more Illinois-headquartered businesses that manage risks using captive insurance arrangements to transact non-admitting insurance without being subject to Illinois premium tax. The repeal would be effective upon enactment. As currently drafted, the Bill does not appear to provide relief for policies subject to tax before the effective date of the repeal.
As we have previously covered in detail, at the end of its 2014 regular legislative session, the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements. The law was enacted under the guise of technical corrections to the insurance code.
Historically, Illinois businesses meeting basic levels of sophistication and size were entitled to obtain coverage from nonadmitted insurers under an “industrial insured” exception to the general prohibition on transacting unauthorized insurance. Senate Bill 3324, now Public Act 98-0978 (the Act), tightened the qualifying criteria for the industrial insured exception and imposed new taxes and fees totaling between 3.6 percent and 4.6 percent of premium—equivalent to those imposed on a policy procured by a surplus lines broker. The potential financial impact has been estimated at upward of $100 million, falling squarely on large- and mid-sized companies headquartered in Illinois. The affected business community was aghast when the surprising tax consequences were discovered, but its efforts to repeal the law in the General Assembly’s fall veto session proved unsuccessful.
The law now has come into effect, applying to policies effective on or after January 1, 2015. The statute provides that reports are due to the Surplus Lines Association of Illinois within 90 days of the effective date of a policy, and so reports for calendar year policies must be filed by April 1, 2015. Applicable taxes and fees are then due 30 days after the filing of the report. The Department of Insurance has not yet provided any guidance on the new law, but the Surplus Lines Association of Illinois has updated its website with an online filing system for businesses subject to the tax. Affected businesses must register and complete their online reports within the requisite 90-day deadline. Reporting is on a policy-by-policy and transaction-by-transaction basis. The system then calculates the applicable taxes and fees. Once a transaction is submitted, the website instructs that Surplus Lines Association of Illinois will e-mail an invoice for its 0.1 percent association stamping fee, and the Illinois Department of Insurance will mail an invoice for the 3.5 percent premium tax and any applicable fire marshal tax.
It remains to be seen whether another, more successful effort to overturn the law will be undertaken during the 2015 legislative session. In the interim, affected taxpayers are required to comply with the law’s filing requirements and will be assessed the new tax.
Despite a strong effort by a coalition of opponents, efforts to repeal the new Illinois self-procured insurance tax law in the veto session of the Illinois General Assembly were unsuccessful. As a result, the law will take effect on January 1, 2015.
As previously covered on this blog, Illinois allows “industrial insureds” to independently procure insurance. Prior to the enactment of the self-procured insurance tax law, Illinois had not imposed tax on these transactions. At the end of the spring legislative session, supposedly technical amendments to the insurance code were passed that imposed a 3.5 percent premium tax on these policies (plus an additional fire marshal tax and surplus line association fee, bringing the total to between 3.6 percent and 4.6 percent depending on the type of insurance). This tax is imposed on the nationwide premium if the insured’s home state is Illinois. Effectively, the statute is a tax on Illinois-headquartered businesses that use captive insurance risk management arrangements.
Despite being alerted to the unfriendly business impact of the bill, Governor Quinn signed it into law with an effective date of January 1, 2015. Since then, the Illinois business community has sought the repeal of the tax or its amendment to exempt captives. There had been hope that this could be achieved after the November election during the veto session or a lame duck session. The Illinois House of Representatives, however, has adjourned and does not plan to reconvene until the 99th General Assembly is inaugurated on January 14, 2015. (The Senate also has adjourned, although the Senate President has left open the possibility of reconvening before inauguration.) Going into the 99th General Assembly, efforts will continue to seek legislative relief for captive insurance arrangements.
The new tax applies to policies of insurance effective on or after January 1, 2015. Within 90 days after the effective date of such a policy, qualifying insureds must file a report with the Surplus Lines Association of Illinois (similar to that required of a surplus lines broker). Within 30 days of filing that report, the insured then must pay to the Department of Insurance the premium tax and, if applicable, the fire marshal tax. Also within those 30 days the insured must pay the 0.1 percent surplus lines association fee to the Surplus Line Association of Illinois. Neither the Department of Insurance nor the Surplus Line Association of Illinois has posted forms or guidance on their websites. Indeed, the guidance on the Surplus Line Association website is outdated and does not reflect the 2014 amendments.
Affected taxpayers should carefully consider their compliance obligations and how to proceed amidst this uncertainty. We will post on this subject again when/if additional guidelines are issued.
Illinois will soon begin taxing self-procured insurance premiums for the first time, as required by Senate Bill 3324, now Public Act 98-0978 (the Act). The Act, which was signed into law by Governor Quinn on August 15, was quietly ushered through the General Assembly as a supposed technical amendment. The Act is anything but—it substantively amends Illinois law to tax Illinois-based companies who self-procure insurance as though they were surplus lines brokers, imposing a 3.5 percent self-procurement tax, together with additional fees and charges. In addition, the Act makes it harder for Illinois companies to self-insure by narrowing the definition of an “industrial insured” and increasing the qualification requirements for risk managers. The new law applies to policies of insurance effective on or after January 1, 2015.
As we explained in a prior post, the Act hurts Illinois-headquartered businesses that manage risks using captive insurance arrangements. With the 2011 enactment of the Nonadmitted and Reinsurance Reform Act (NRRA), a company’s home state – typically its principal place of business – has exclusive authority to tax and regulate nonadmitted insurance. See 15 U.S.C. § 8201. For Illinois-headquartered businesses, this arrangement worked well because Illinois law previously allowed “industrial insureds” – companies meeting minimal size and sophistication requirements – to transact nonadmitted insurance without paying tax. An Illinois-headquartered company thus could obtain insurance from its captive domiciled overseas or in a captive-friendly U.S. state without paying any tax on its premiums.
The Act ends this business-friendly state of affairs. An industrial insured transacting nonadmitted insurance for a policy taking effect on or after January 1, 2015, will now have to withhold (or pay out-of-pocket if it does not withhold) a 3.5 percent premium tax on insurance contracts. Two additional charges increase the total effective rate to anywhere from 3.6 percent to 4.6 percent: a countersigning fee of 0.1 percent to support the Surplus Line Association of Illinois, and for certain lines of insurance, a fire marshal tax of anywhere from 0.01 percent to 1.00 percent of premium.
The Act also makes it more difficult for Illinois companies to self-insure by narrowing the definition of an “industrial insured,” where companies must qualify as an “industrial insured” in order to have the right to self-insure. Until now Illinois company could be an “industrial insured” if its annual premium for insurance of all risks except life and accident and health insurance exceeded $100,000 and it had either (a) at least 25 full-time employees, (b) more than $3 million of gross assets, or (c) gross revenues of more than $5 million. Under the Act, an industrial insured now must meet the requirements of an “exempt commercial purchaser” under 215 ILCS 5/445(1), which include having nationwide commercial property and casualty insurance premiums in excess of $100,000 annually and having either (a) net worth of more than $20 million, (b) more than $50 million of annual revenues, (c) more than 500 full time employees or more than 1,000 employees in an affiliated group, (d) a nonprofit [...]
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Illinois Senate Bill 3324, an insurance bill that would impose a premium tax on Illinois companies obtaining unauthorized insurance, has passed the General Assembly and is awaiting Governor Quinn’s signature. If signed into law, the bill will have a significant negative impact on captive insurance and any other unadmitted insurance arrangements used by businesses with a home state of Illinois. Such companies will be taxed on 3.5 percent of their premiums paid on unadmitted policies effective January 1, 2015, and thereafter.
The Favorable Status Quo for Illinois “Industrial” Insureds under the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA)
A state’s premium tax structure typically has three components:
Until now, Illinois has not taxed self-procured insurance. Illinois traditionally has allowed “industrial insureds” – companies meeting certain thresholds of size and sophistication – to obtain coverage from non-admitted insurers without violating the prohibition against the unauthorized transaction of insurance in the state (see 215 ILCS 5/121-2 (prohibiting transacting insurance without a certificate of authority), 121-2.08 (excepting transactions with “industrial insureds” and defining the term)) and without the imposition of premium tax.
This exception became particularly beneficial to companies headquartered in Illinois after the enactment of the NRRA, which was part of the Dodd-Frank Act. See P.L. 111-203, tit. V, §§ 521-527, 124 Stat. 1589 (codified at 15 U.S.C. § 8201 et seq.). The NRRA provides that “[n]o State other than the home State of an insured may require any premium tax payment for nonadmitted insurance.” 15 U.S.C. § 8201(a). The “home state” is generally a company’s principal place of business. See 15 U.S.C. § 8206(6) (a detailed discussion of the definition of “home state” is beyond the scope of this post). With the enactment of the NRRA, companies having Illinois as their “home state” have experienced a significant savings: If they qualify as industrial insureds, they effectively can obtain unauthorized insurance coverage of their nationwide risks without paying any state premium tax, as Illinois doesn’t impose a premium tax and other states are precluded from collecting tax from non “home state” companies.
S.B. 3324 Would Impose a 3.5 percent Tax on Premiums Paid by Illinois Industrial Insureds
S.B. 3324 would end this happy state of affairs. It amends 215 ILCS 5/121-2.08 to require industrial insureds to pay tax at the 3.5 percent of premiums rate that is applicable to surplus lines transactions (imposed at 215 ILCS 5/445(3)(a)(ii)). The adverse impact of the tax could be significant, particularly for Illinois home state industrial insureds with captive insurance [...]
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