Captives, NRRA and Nonadmitted Insurance Premium Taxes – A Primer (Part II)

Last week, we reviewed the basics about captive insurance companies, nonadmitted insurance and the essence of the federal legislation known as the Nonadmitted and Reinsurance Reform Act (NRRA). This week, we examine what the states did to implement NRRA and how that affected, or may affect, insurance premiums paid to out-of-state captives.

Following enactment of NRRA in 2010, virtually all states enacted their state-law equivalent of NRRA’s “home state” definition. See 15 USC § 8206(6); Minn. Stat. § 297I.01, subd. 10a. But the states did not implement the Congressionally intended “compact” or any other procedures to provide for the “allocation of premium taxes for nonadmitted insurance” as expressly provided for in NRRA. Instead, the states effectively fought over who was really the “home state” of the insured and thus which state could lay claim to ALL of the premium taxes paid by a home state insured for nonadmitted insurance.

This effort of home states to obtain these additional state tax revenues includes Minnesota, as we are seeing today. Minnesota, Washington State and New Jersey are all states, among others, that have made recent, concerted efforts to enforce or collect nonadmitted insurance taxes, and have met with varying responses (discussed below). It seems that both insureds and the state insurance/tax departments have decided that no inter-state “compact” or nonadmitted tax sharing agreement is going to be implemented, so it is every state for itself…

In December 2020, the Minnesota Department of Revenue formally amended this state’s nonadmitted insurance reporting form (IG255). This is the form required to be filed for Nonadmitted Insurance Premium Taxes. The December 2020 amendment expressly included both (a) the Minnesota “home state” definition (referenced above) that Minnesota enacted in 2011 and (b) a new definition that the Form also applies nonadmitted premium taxes paid by Minnesota home state insureds to “captive insurance companies” formed outside this state.

This express change to the Minnesota nonadmitted insurance reporting form (for the first time since Minnesota’s enactment in 2011 of the NRRA home state rules) so late in the reporting year has caused consternation, resistance, concerns about unfair surprise, interpretive disputes and worse by Minnesota insureds.

Other states are experiencing similar resistance and pushback. For example, Washington State just amended its nonadmitted insurance tax law, in response to sustained resistance, to tax only Washington State situated risks insured by out-of-state captives. Washington State imposed the tax not on the insureds, but on the captive insurers. (See SB 5315 signed into law on May 12, 2021.)

New Jersey has had its own resistance to application of its nonadmitted insurance rule, as evidenced by the recent New Jersey Supreme Court decision ending the case of Johnson & Johnson v. Director, Division of Taxation, 241 A.3d 318 (N.J. 2020). On December 7, 2020, the New Jersey Supreme Court upheld (by a 5-1, one-paragraph, per curiam decision) the taxpayer’s 2019 win at the NJ Appeals Court level against imposition of the New Jersey nonadmitted insurance tax on premium payments to its captive. The Court agreed with the lower court that the law in question as written applied only to surplus lines tax, not self-procured tax of the kind purchased by the taxpayer from its Bermuda captive.

Taxpayer resistance to perceived administrative overreaching and to the continuing lack of adherence to express Congressional intent – that there also be implemented a national process to equitably allocate nonadmitted premium taxes collected procedurally by the home states – means this issue of nonadmitted insurance procured from captives is not yet over – here or elsewhere.

Minnesota can be said to have poked the sleeping insurance tax bear; we will see how this plays out given the recent changes by the DOR to the IG255 nonadmitted insurance tax reporting form…

Read Part I

  • Kenneth S. Levinson
    Of Counsel

    Ken focuses on worldwide tax planning, transaction structuring and a number of tax issues related to mergers and acquisitions, IP licensing, employee relocation, and international franchising. He has extensive experience ...

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