Are reinsurance premiums counted as 'premiums' when testing whether more than 95% of an insurer's premiums are for annuity contracts under section 1505(b)?

Plain-English summary

First Alexander Hamilton Life Insurance Co. asked how to count premiums for the section 1505(b) test. Article 33's section 1505 caps an insurer's franchise-plus-premiums tax; section 1505(b) provides that if more than 95% of a company's premiums are for annuity contracts (or for the section 1510(c)(2) policies -- group insurance for the elderly and ocean marine), then annuity and 1510(c)(2) premiums are folded into the capped premiums-tax computation. The statute does not define "premiums" for that 95% test. First Alexander Hamilton asked (1) whether reinsurance premiums count, and if so, whether it matters that they come from (2) an unlicensed insurer or (3) an affiliated unlicensed insurer.

Yes to all three. Because the section 1505 cap is built on the premiums tax in section 1510, the Department uses the definition in the first sentence of section 1510(c)(1) -- "all amounts received as consideration for insurance contracts or reinsurance contracts," plus deposits, assessments, fees, and the like -- modified (per section 1505(b)) to include annuity contracts. So "premiums" for the 95% test includes reinsurance premiums, and it makes no difference that the reinsurance comes from an insurer not licensed in New York, or from an affiliated insurer not licensed in New York. This follows John Alden (TSB-A-95(21)C) and Royal Life (TSB-A-94(15)C).

What this means for you

The 95% annuity test uses the section 1510(c)(1) premium definition

Although section 1505(b) does not define "premiums," the Department borrows the first-sentence definition from section 1510(c)(1) (because the cap is computed off the section 1510 premiums tax), modified to include annuity premiums.

Reinsurance premiums are counted

All amounts received as consideration for reinsurance contracts are "premiums" for the 95% test, just like direct premiums.

The source of the reinsurance does not matter

It is irrelevant whether the reinsurance premiums come from an unlicensed insurer, or from an affiliated unlicensed insurer; they still count.

Common questions

Q: Do reinsurance premiums count toward the 95%-annuity test under section 1505(b)?
A: Yes. "Premiums" for that test uses the section 1510(c)(1) definition, which includes amounts received for reinsurance contracts.

Q: Does it matter if the reinsurance is from an unlicensed insurer?
A: No. Reinsurance premiums from an unlicensed insurer -- including an affiliated unlicensed insurer -- are counted.

Q: Why does this matter?
A: Crossing the 95% threshold changes how the section 1505 cap is computed, folding annuity and section 1510(c)(2) premiums into the capped premiums-tax calculation.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1505 (cap on Article 33 tax); section 1505(b) (95% annuity / ocean-marine premium test)
- Tax Law section 1510(c)(1) (definition of "premium," including reinsurance contracts); section 1510(c)(2) (group insurance for the elderly; ocean marine)
- Laws of 1978, Chapter 480 (memorandum in support; purpose of section 1505(b))
- John Alden Life Insurance Company of New York, TSB-A-95(21)C; Royal Life Insurance Company of New York, TSB-A-94(15)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_29c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (29) C
Corporation Tax
December 31, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C961126A

On November 26, 1996, a Petition for Advisory Opinion was received from First Alexander
Hamilton Life Insurance Co., 6225 Sheridan Drive, Williamsville, New York 14221.
The issues raised by Petitioner, First Alexander Hamilton Life Insurance Co., are:
1. Whether reinsurance premiums received by Petitioner 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 makes any difference that the reinsurance
premiums are received from an insurer that is not licensed to transact business in New York.
3. If the answer to issue "1" is yes, whether it makes any difference that the reinsurance
premiums are received from an affiliated insurer that is not licensed to transact business in New
York.
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.
(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)].

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TSB-A-96 (29) C
Corporation Tax
December 31, 1996

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
contract . . . .
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 John Alden Life Insurance Company
of New York, Adv Op Comm T & F, December 18, 1995, TSB-A-95(21)C, and Royal Life
Insurance Company of New York, Adv Op Comm T & F, November 1, 1994, TSB-A-94(15)C. In
both John Alden and 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 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,
and section 1510 of the Tax Law and John Alden, supra, and Royal Life, supra, when determining

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TSB-A-96 (29) C
Corporation Tax
December 31, 1996

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. This includes reinsurance premiums received from an
insurer that is not licensed to transact business in New York and reinsurance premiums received
from an affiliated insurer that is not licensed to transact business in 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 31, 1996

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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