The Senate just approved a tax bill with several provisions that could impact the insurance industry.The Senate approved a sweeping overhaul of the nation’s tax code on December 2nd in a 51 to 49 vote, with only Sen. Bob Corker of Tennessee joining his Democratic colleagues in opposing the legislation. The bill must be now reconciled with an earlier version passed by the House of Representatives.
While the legislation touches on many aspects of the tax code, the bill is centered around a lowering of the corporate tax levy. While both the House and Senate version propose reducing the corporate rate from 35% to 20%, some senators and President Donald Trump have suggested increasing the floor to 22%.
As for individual tax rates, the House version supports maintaining the top level at 39.6%, but cuts the number of tax brackets from seven to four. In contrast, the Senate bill decreases the top tax rate to 38.5% while keeping all seven of the current tax classes.
Though not yet finalized, the tax bills discussed in the Senate and House feature several key provisions that could impact the insurance industry, agents, and their clients. Here are three of the most significant changes that it could bring to the industry.
In the House version authored by Rep. Kevin Brady (R-TX) and an original version written by Sen. Orrin Hatch (R-UT), life insurers would be allowed to retain 76.5% of their statutory reserves as tax reserves, a move that would generate roughly $15 billion over 10 years for the federal government, but would cost life insurers $1.5 billion per year, according to the congressional Joint Committee on Taxation (JCT).
The Hatch/Brady proposals also propose changes to how life insurers determine “deferred acquisition costs,” or DAC expenses, which calculate the dollars allocated to generate new life insurance and annuity business, including marketing, underwriting, and paying sales commissions. A JCT analysis estimated that Rep. Brady’s DAC proposal would mean cost life insurers $7 billion over 10 years, while the Hatch version would cost about $23 billion over the same period.
As the bill was being marked up in the Senate, Sen. Tim Scott (R-SC) introduced a number of amendments regarding life insurance that were reportedly included in the Senate’s package, though they weren’t debated on the floor. Sen. Scott backed a proposal to extend the amortization period for DAC expenses from 10 years to 15 and hike the DAC capitalization rate for new new business by 20%. In addition, he requested letting life insurers retain 95% of their statutory reserves for tax purposes. A substitute amendment in the Hatch bill, however, changed the percentage allowed for tax reserves to 92.87%.
The Senate iteration of the tax bill eliminates the Affordable Care Act’s (ACA) individual mandate. The House version does not, but Rep. Brady said that he believes the final bill will scrap the federal requirement to buy health insurance.
Several analyses differ on the ultimate effect cancelling the individual mandate would have on the health insurance marketplace. The Congressional Budget Office estimates that without the individual mandate, 13 million more Americans would be uninsured over the next 10 years and premiums would rise by roughly 10% on average.
According to one CBO analyst, however, eliminating the individual mandate may not significantly inflate the number of uninsured Americans because many people have become accustomed to having health insurance. “Repealing the mandate is not the same as never having had a mandate,” Alexandra Minicozzi wrote in a CBO analysis. In other words, estimating the number of uninsured doesn’t take into account the public’s growing knowledge of the importance of having medical coverage.
In another related portion of the proposed tax measures, the House bill excludes the medical expense deduction. The Senate version takes the opposite approach, triggering the deduction when medical expenses exceed 7.5% of a taxpayer’s income instead of 10%.
Though much of the tax discussion has revolved around corporate tax rates, small businesses classified as pass-through entities (S corporations and limited liability companies) also stand to receive a tax break under the Senate versions. This might impact insurance agents who run their own small agencies or clients who operate small businesses.
Current law mandates that profits from a small business “pass through” to the owner and are subsequently taxed at the individual rate, which, as previously stated, can reach as high as 39.6%. The Senate bill lowers that rate to 23% of pass-through income.