Revenue Administrative Bulletin 2022-20

THE EFFECT OF MICHIGAN CATASTROPHIC CLAIMS ASSOCIATION REFUND OF SURPLUS AMOUNTS ON THE GROSS DIRECT PREMIUMS TAX BASE OF MOTOR VEHICLE INSURERS

Approved: November 22, 2022

RAB 2022-20.¹ This bulletin describes the treatment of refunds under Chapter 12 of Part 2² of the Income Tax Act3 of surplus amounts received by motor vehicle insurers from the Michigan Catastrophic Claims Association (MCCA) in 2022.

ISSUE

Whether motor vehicle insurers may adjust CIT gross direct premiums for the refund of surplus amounts received from the MCCA in 2022 that are to be refunded to policyholders?

CONCLUSIONS

No, consistent with reporting guidance from the Department of Insurance and Financial Services (DIFS), insurance companies must report the surplus amounts from the MCCA that are to be refunded to policyholders as a liability. This liability can be reported as an aggregate write-in or other appropriate line on the balance sheet. The member insurance companies will also book a receivable from the MCCA as an asset on the balance sheet. This reporting requirement will not reduce the gross direct premiums insurers must report on Form 4905, Insurance Company Annual Return for Corporate Income and Retaliatory Taxes.

LAW AND ANALYSIS

In 1978, when no fault auto insurance was instituted in Michigan, the Legislature required the establishment of a catastrophic claims association to indemnify no-fault insurers from losses in excess of $250,000 for personal protection insurance coverage. Michigan law requires that every no-fault insurer be a member of the MCCA and gives the association the authority to charge a premium to its members who pass the amount along to their policyholders in auto insurance premiums.4 As announced in DIFS Bulletin 2021-44-INS, the MCCA voted to return $3 billion of its excess premiums to its member insurance companies by March 9, 2022. The amount returned to each association member is required to be promptly remitted to that member’s policyholders in the form of refunds of $400.00 per vehicle covered by policies that were in-force as of 11:59 p.m. on October 31, 2021, Eastern Standard Time.

CIT Treatment

The CIT requires each insurance company writing policies on property or risks in Michigan to pay a tax equal to 1.25% of gross direct premiums.5 Premiums written on motor vehicles in Michigan are included in gross direct premiums reported for the CIT.  For tax years beginning on and after January 1, 2017, an insurance company may not include in the credit calculation amounts paid to the Michigan automobile insurance placement facility that are attributable to assigned claims including catastrophic premiums approved under chapter 31 of the insurance code of 1956, 1956 PA 218, MCL 500.3101 to 500.3179.6

In Bulletin 2022-06-INS, DIFS provides guidance to member insurance companies receiving a refund from the MCCA requiring them to directly refund the pass-through to policyholders without delay.  This guidance specifically states that the required reporting will not impact surplus or the income statement. Rather, member insurance companies must record the refund from the MCCA that is to be refunded to policyholders as a liability. The liability can be reported as an aggregate write-in or other appropriate line on the balance sheet. Member insurance companies will also book an offsetting receivable from the MCCA as an asset on the balance sheet.

Consistent with the accounting treatment prescribed by DIFS through Bulletin 2022-06-INS, the MCCA surplus amounts returned to insurance companies for subsequent distribution to policyholders is not regarded as a premium under the Income Tax Act.  As such, the MCCA surplus amounts received by an insurance company will neither be included in “gross direct premiums” reported in 2022 nor will impact “gross direct premiums” previously subject to the premiums tax in any prior year. Insurance companies may not make any adjustments to gross direct premiums related to the receipt of the MCCA surplus, such as filing an amended return for a prior tax year or adjusting gross direct premiums otherwise received in 2022.

Based on the reporting required by DIFS, insurance companies must consistently report gross direct premiums on Form 4905. That is, gross direct premiums will not be reduced for any pass-through amounts from the MCCA that are required to be directly refunded to the policyholders.

¹ Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006 and shall not be penalized for that reliance until the bulletin is revoked in writing.  However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.

² Commonly referred to as the Corporate Income Tax (CIT).

³ MCL 206.635 – MCL 206.643.

⁴ MCL 500.3104. As of July 1, 2021, the personal protection amount had risen to $580,000.00 and must be increased biennially on July 1 of each odd-numbered year, for policies issued or renewed before July 1 of the following odd-numbered year, by the lesser of 6% or the Consumer Price Index.

⁵ MCL 206.635(2).

⁶ MCL 206.637.