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Notice Regarding the Michigan Catastrophic Claims Association Surplus For Insurers Subject to the Premiums Tax
Issued: February 17, 2022
This notice discusses the tax treatment of the Michigan Catastrophic Claims Association (MCCA) surplus received by insurers subject to the premiums tax under Part 2 of the Income Tax Act.
On November 3, 2021, the Michigan Catastrophic Claims Association (MCCA) voted to return an estimated $3.0 billion surplus to its member insurance companies. The MCCA will return that surplus through refunds issued to member insurance companies on or before March 9, 2022. Because policyholders ultimately pay the MCCA premium through a charge passed through by those insurers, Bulletin 2021-44-INS, issued by the Department of Insurance and Financial Services (DIFS) on December 13, 2021, requires those insurers to issue a single, lump sum refund directly to all policyholders with insurance policies in-force as of 11:59 p.m. on October 31, 2021, Eastern Standard Time. For most policyholders, this equates to a $400 refund per vehicle, to be received from their respective insurer no later than May 9, 2022.
On February 2, 2022, DIFS issued Bulletin 2022-06-INS to provide additional guidance related to the presentation of the MCCA surplus on the annual financial statements that insurers must file with DIFS each year. DIFS concluded that insurance companies should record the MCCA surplus as a receivable for all amounts to be received from the MCCA and an offsetting liability for amounts to be paid to policyholders. DIFS further concluded that the MCCA surplus would have no impact on the presentation of the income statement of the insurer. By concluding that the income statement of an insurer is not impacted, DIFS has determined that the MCCA surplus issued to an insurer is not characterized as a return of premiums.
Chapter 12 of Part 2 of the Income Tax Act, MCL 206.635 et seq., levies a premiums tax on insurance companies equal to 1.25% of "gross direct premiums" written on property or risk located or residing in this state. Consistent with the accounting treatment prescribed by DIFS through Bulletin 2022-06-INS, the MCCA surplus returned to insurance companies for subsequent distribution to policyholders is not regarded as a "gross direct premium" under the Income Tax Act. As such, the MCCA surplus received by an insurer will neither be included in "gross direct premiums" reported in 2022 nor impact "gross direct premiums" previously subject to the premiums tax in any prior year. Insurers may therefore not make any adjustments to gross direct premiums related to the receipt of the MCCA surplus, such as the filing of an amended return to correct a prior tax year or the reporting of an adjustment to gross direct premiums otherwise received in 2022.