For the section 1505(b) test of whether more than 95% of an insurer's premiums are annuity consideration, does 'premiums' include reinsurance premiums and all direct premiums (in and out of New York)?

Plain-English summary

PM Group Life Insurance Company, an Arizona insurer (a subsidiary of Pacific Life) looking to expand into New York, asked how to count "premiums" for the section 1505(b) test. Article 33 caps an insurer's franchise tax at an amount computed as if the tax were the section 1510 premiums tax. Section 1505(b) provides a special rule: if more than 95% of an insurer's premiums are received as consideration for annuity contracts (or for the section 1510(c)(2) lines -- group insurance for the elderly and ocean marine insurance), then annuity consideration is included in the cap computation. But section 1505(b) does not define "premiums" for the 95% test itself.

PM Group asked three questions: does "premiums" include (1) reinsurance premiums; (2) reinsurance premiums received from a non-New-York-licensed, a New-York-licensed, or an affiliated insurer; and (3) all direct premiums, on risks both inside and outside New York.

Following First Alexander Hamilton, John Alden, and Royal Life, the Department held that because the 1505 cap is based on the section 1510 premiums tax, "premiums" for the 95% test means premiums as defined in the first sentence of section 1510(c)(1), modified to include amounts received as consideration for annuity contracts. That definition reaches all amounts received for insurance or reinsurance contracts -- including premium deposits, assessments, policy fees, membership fees, and every other compensation. So reinsurance premiums count (from non-licensed, licensed, or affiliated insurers alike), and all direct premiums count, on risks resident inside and outside New York.

What this means for you

The 95% test uses the section 1510 premium definition

Because the cap is keyed to the premiums tax, the same broad definition of "premium" controls the 95% denominator -- modified to fold annuity consideration into the numerator and denominator.

Reinsurance premiums are premiums

Amounts received under reinsurance contracts count regardless of whether the ceding insurer is licensed in New York, unlicensed, or an affiliate.

Direct premiums everywhere count

All direct premiums an insurer receives are included, on risks resident both in and outside New York -- not just New York risks.

Common questions

Q: Why does the premium definition matter?
A: It determines whether the insurer crosses the 95%-annuity threshold that pulls annuity premiums into the section 1505 tax cap.

Q: Does it matter if reinsurance comes from an affiliate?
A: No. Reinsurance premiums from an affiliated insurer count the same as from any other insurer.

Q: Are out-of-state direct premiums included?
A: Yes. All direct premiums are included, whether the underlying risks are inside or outside New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1505 (limitation on insurance franchise tax)
- Tax Law section 1505(a)(2) (cap computed as if tax were under section 1510)
- Tax Law section 1505(b) (more-than-95-percent annuity premiums test)
- Tax Law section 1510 (premiums tax)
- Tax Law section 1510(c)(1) (definition of premium)
- Tax Law section 1510(c)(2) (group insurance for the elderly and ocean marine insurance)
- First Alexander Hamilton Life Insurance Co., TSB-A-96(29)C (Dec. 31, 1996)
- John Alden Life Insurance Company of New York, TSB-A-95(21)C (Dec. 18, 1995)
- Royal Life Insurance Company of New York, TSB-A-94(15)C (Nov. 1, 1994)
- PM Group Life Insurance Company, TSB-A-98(13)C (Aug. 5, 1998)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a98_13c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(13)C
Corporation Tax
August 5, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C980605A

On June 5, 1998, a Petition for Advisory Opinion was received from PM Group
Life Insurance Company, 700 Newport Center Drive, Newport Beach, California
92660-6397.
The issues raised by Petitioner, PM Group Life Insurance Company, 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 received by an insurance company from an insurer not licensed to
transact business in New York, an insurer licensed to transact business in New
York or an affiliated insurer.
3. Whether all direct premiums received by an insurance company, both on
risks resident in New York and those outside of New York 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.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner, an Arizona corporation, is a wholly owned subsidiary of Pacific
Life Insurance Company ("Pacific Life") a California corporation. Petitioner is
licensed as an insurance company in most states but is not licensed in New York.
Pacific Life is licensed as an insurance company in all states with the exception
of New York. Petitioner desires to expand its business within New York State and
obtain a license from the New York State Insurance Department to sell life,
accident & health and annuity insurance policies. Petitioner may also obtain
reinsurance premiums from an unrelated insurer not licensed to transact business
in New York or from an affiliated insurer not licensed to transact business in
New York.
Section 1505 of the Tax Law, as amended applicable to taxable years
commencing on and after January 1, 1998, provides as follows:
(a)(2) Domestic, foreign and alien life insurance corporations. The
provisions of this paragraph shall apply to taxpayers subject to tax
under [section 1510(b)(1)] of this article. Notwithstanding the
provisions of sections [1501 and 1510] of this article, the amount
of taxes imposed under such sections ... computed without regard to
any credits allowable against such tax other than those credits

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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 ... two
percent for taxable years beginning on or after [January 1, 1998].
(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 contract....
For purposes of the limitation set forth in section 1505(a)(2) 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 percent for taxable years beginning on
or after January 1, 1998. 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)(2).
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

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August 5, 1998

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 First Alexander
Hamilton Life Insurance Co., Adv Op Comm T & F, December 31, 1996, TSB-A 96(29)C,
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 these cases, 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 First Alexander, supra,
John Alden, supra, 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. This includes reinsurance premiums
received from an insurer that is not licensed to transact business in New York,
reinsurance premiums received from an insurer that is licensed to transact
business in New York and reinsurance premiums received from 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

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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: August 5, 1998

NOTE:

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

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