For deciding whether more than 95 percent of an insurance company's 'premiums' under section 1505(b) are for annuity contracts, do 'premiums' include reinsurance premiums (including from licensed or affiliated insurers) and all direct premiums on both New York and out-of-state risks?

Plain-English summary

John Alden Life Insurance Company of New York is a life insurer whose business is mostly annuity contracts. Article 33 imposes an insurance franchise tax, and section 1505(a) caps that tax by reference to what the premiums tax (section 1510) would be; section 1505(b) provides that if more than 95 percent of an insurer's premiums are for annuity contracts (or section 1510(c)(2) policies -- group insurance for the elderly and ocean marine), those premiums get folded into the cap computation. But section 1505(b) does not define "premiums" for the 95% test. John Alden asked: does "premiums" include (1) reinsurance premiums, (2) reinsurance from a New-York-licensed or affiliated insurer, and (3) all direct premiums on both New York and out-of-state risks?

Yes to all. Following Royal Life and the 1978 legislative history, the term "premiums" for the 95% test means premiums as in the first sentence of section 1510(c)(1), modified to include amounts received as consideration for annuity contracts. So "premiums" includes all amounts received as consideration for insurance or reinsurance contracts (including annuity), plus premium deposits, assessments, policy fees, membership fees and similar charges -- regardless of whether the insurer paying the reinsurance premiums is licensed in New York or is an affiliate -- and includes all direct premiums on risks both resident in and outside New York.

What this means for you

"Premiums" for the 95% test is broad

It is the first-sentence section 1510(c)(1) definition modified to include annuity consideration -- covering insurance and reinsurance contracts and the various deposits, fees and assessments.

Reinsurance counts, even from affiliates

Reinsurance premiums received count toward the 95% test whether or not the paying insurer is licensed in New York and whether or not it is an affiliate.

All direct premiums count, in-state and out

Direct premiums on both New York-resident and out-of-state risks are included in the 95% measurement.

Common questions

Q: Do reinsurance premiums count toward the 95% annuity test?
A: Yes -- the broad "premiums" definition includes consideration for reinsurance contracts.

Q: Does it matter if the reinsurance comes from an affiliate or an unlicensed insurer?
A: No. It counts regardless of license status or affiliation.

Q: Are out-of-state direct premiums included?
A: Yes -- all direct premiums on risks inside and outside New York are counted.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1505(a) (limitation on the Article 33 tax, computed as if under section 1510 at 2.6%)
- Tax Law section 1505(b) (if more than 95% of premiums are for annuity contracts or section 1510(c)(2) policies, include them in the cap)
- Tax Law section 1510(c)(1) (definition of "premium" -- consideration for insurance/reinsurance, deposits, fees, etc.)
- Tax Law section 1510(c)(2) (group insurance for the elderly; ocean marine insurance)
- Royal Life Insurance Company of New York, TSB-A-94(15)C (use the first sentence of 1510(c)(1) modified to include annuity)
- Root of First Alexander Hamilton Life, TSB-A-96(29)C (same 1505(b) 95%-annuity reinsurance rule)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a95_21c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (21) C
Corporation Tax
December 18, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C950802B

On August 2, 1995, a Petition for Advisory Opinion was received from John Alden Life
Insurance Company of New York, 7300 Corporate Center Drive (7B28), Miami, Florida 33126.
The issues raised by Petitioner, John Alden Life Insurance Company of New York, are:
1. Whether reinsurance premiums received by an insurance company are included within the
term "premiums" as used in section 1505(b) of the Tax Law for purposes of computing whether more
than 95 percent of the "premiums" received by an insurance company are received as consideration
for annuity contracts.
2. If the answer to issue "1" is yes, whether it matters if the reinsurance premiums are paid
to an insurance company by an insurer that is licensed to transact business in New York or by an
affiliated insurer.
3. Whether the term "premiums" as used in section 1505(b) of the Tax Law, for purposes
of computing whether more than 95 percent of the "premiums" received by an insurance company
are received as consideration for annuity contracts, includes all direct premiums received by an
insurance company, both on risks resident in New York and outside of New York.
Petitioner is a life insurance corporation licensed to transact an insurance business in New
York State. At this time, Petitioner is not licensed to transact an insurance business in any other
jurisdiction. Petitioner receives premiums from customers for the sale of life insurance policies,
group accident and health policies and annuity contracts. The majority of the premiums that
Petitioner receives are received as consideration for annuity contracts.
Section 1505 of the Tax Law provides as follows:
(a) Notwithstanding the provisions of sections [1501 and 1510], the amount of taxes
imposed under such sections ... computed without regard to any credits allowable
against such tax other than those credits provided under [section 1511(g) and (h)],
shall not exceed an amount computed as if such taxes were determined solely under
section [1510], except that for purposes of the limitation provided herein, the rate of
tax under such section shall be deemed to be [2.6] percent.
TP-9 (9/88)

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TSB-A-95 (21) C
Corporation Tax
December 18, 1995

(b) For purposes of the limitation set forth in subdivision (a) of this section, in the
case of an insurance corporation more than [95] percent of whose premiums are
received as consideration for annuity contracts or are for policies and insurance
described in [section 1510(c)(2)], in determining the amount of tax computed solely
under section [1510], gross direct premiums subject to tax under such section shall
include all amounts received as consideration for annuity contracts and premiums for
policies and insurance, including any separate costs assessed by such insurance
corporation upon its policyholders, described in [section 1510(c)(2)].
Section 1510(c)(1) of the Tax Law provides, in part, as follows:
The term "premium" includes all amounts received as consideration for insurance
contracts or reinsurance contracts, other than for annuity contracts, and shall include
premium deposits, assessments, policy fees, membership fees, any separate costs by
carriers assessed upon their policyholders and every other compensation for such
contact ....
For purposes of the limitation set forth in section 1505(a) of the Tax Law, the amount of
taxes imposed by sections 1501 and 1510 of the Tax Law, computed without regard to any credits
allowable against such taxes other than those credits provided under section 1511(g) and (h), shall
not exceed the amount determined as if such taxes were computed solely under section 1510 of the
Tax Law with the rate of tax deemed to be 2.6 percent. Section 1505(b) of the Tax Law provides that
if more than 95 percent of an insurance corporation's premiums are received as consideration for
annuity contracts or are for policies and insurance described in section 1510(c)(2) of the Tax Law
(i.e. group insurance for the elderly and ocean marine insurance), premiums for annuity contracts and
insurance described in section 1510(c)(2) are to be included in the computation of gross direct
premiums for purposes of the limitation set forth in section 1505(a). However, section 1505(b) of
the Tax Law does not define the term "premiums" for purposes of the 95 percent determination.
The memorandum in support of the Laws of 1978, Chapter 480, which added section 1505(b)
of the Tax Law states, in part, that:
the current statute exempts both annuity business and ocean marine insurance from
the premiums tax. Consequently, companies primarily engaged in these lines of
business are virtually, if not totally, exempted from the net income tax. To cure this
defect the bill amends Article 33 so that for purposes of the income tax, a company
with more than 95% of its business in annuity contracts or ocean marine insurance
or both must include those premiums in determining the "cap" on its income tax.
(emphasis added) (NY Legis Ann, 1978, p 284, 287)
The issues raised herein were addressed previously in Royal Life Insurance Company of New
York, Adv 0p Comm T & F, November 1, 1994, TSB-A-94(15)C. In Royal Life, it was held that
since the limitation contained in section 1505 of the Tax Law is based on the amount of tax that
would be computed under the premiums tax imposed under section 1510, it is appropriate to use the

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Corporation Tax
December 18, 1995

definition contained in the first sentence of section 1510(c)(1), modified as required by section
1505(b) of the Tax Law, for purposes of computing the limitation under section 1505 of the Tax
Law.
Therefore, in accordance with the memorandum in support of the Laws of 1978, Chapter 480,
section 1510 of the Tax Law and Royal Life, supra, when determining whether more than 95 percent
of an insurance corporation's premiums are received as consideration for annuity contracts or are for
policies and insurance described in section 1510(c)(2) of the Tax Law, the term “premiums” means
premiums as used in the first sentence of section 1510(c)(1) of the Tax Law modified to include
amounts received as consideration for annuity contracts. That is, the term "premiums" includes all
amounts received as consideration for insurance contracts or reinsurance contracts, including annuity
contracts, and shall include premium deposits, assessments, policy fees, membership fees, any
separate costs by carriers assessed upon their policyholders and every other compensation for such
contract.
Herein, with respect to issues "1", "2" and "3", for purposes of computing whether more than
95 percent of the premiums received by an insurance company are received as consideration for
annuity contracts under section 1505(b) of the Tax Law, the term "premiums" has the same meaning
as used in the first sentence of section 1510(c)(1) of the Tax Law modified to include amounts
received as consideration for annuity contracts. Such term includes all amounts received as
consideration for reinsurance contracts, regardless of whether the insurer paying the reinsurance
premiums is licensed to transact business in New York or is an affiliated insurer. Such term also
includes all direct premiums received by an insurance company, both on risks resident in New York
and outside of New York.
It should be noted that, where an insurance company determines that more than 95 percent
of its premiums are received as consideration for annuity contracts or are for policies and insurance
described in section 1510(c)(2) of the Tax Law, such insurance company computes the limitation
under section 1505 of the Tax Law by using the method set forth in section 1510(c) of the Tax Law
for determining gross direct premiums, modified as required by section 1505(b) of the Tax Law.
That is, gross direct premiums are modified by including all amounts received as consideration for
annuity contracts for policies and insurance, including any separate costs assessed by such insurance
corporation upon its policyholders, described in section 1510(c)(2) of the Tax Law.

DATED: December 18, 1995

NOTE:

s/DORIS S. BAUMAN
Director
Technical Services Bureau

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.