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Captive Insurance Carve-Out: Illinois SB 1573 Amendment Proposed

Members of the Illinois General Assembly continue to make efforts to ameliorate the impact of Illinois’ new self-procurement tax on captive insurance.  On March 10, 2015, Sen. William Haine (D-Alton) filed an amendment to Senate Bill 1573, which was originally introduced under his sponsorship on February 20, 2015, and is now pending in the Senate Insurance Committee. As originally presented, the Bill would basically undo last year’s legislation (P.A. 98-978) imposing a self-procurement tax and narrowing the industrial insured exemption.  The amendment takes a more nuanced approach, by carving out captive insurance arrangements from the tax while leaving the narrowed definition of industrial insured in place.

The amendment proposes to amend the law to simply provide that contracts of insurance with a captive insurance company are not subject to the taxes and fee (3.5 percent self-procurement tax, 0 percent to 1 percent fire marshal tax, 0.1 percent surplus lines association fee) imposed by Public Act 98-978. The amendment defines a “captive insurance company” broadly to include “any affiliated insurance company … or special purpose financial captive insurance company formed to insure the operational risks of the company’s parent or affiliates, risks of a controlled unaffiliated business, or other risks approved by the captive insurance company’s board or other regulatory body.” The definition also enumerates several kinds of captive insurance companies as specifically included.

This proposed exemption for insurance placed directly with captive insurance companies would leave unaffected the increased qualification requirements to be an “industrial insured” eligible to self-procure insurance from unadmitted carriers. Insurance directly procured from a nonadmitted commercial carrier would continue to be subject to tax. The amendment also changes the effective date of the Act to January 1, 2016, whereas previously the bill would have been effective immediately upon becoming law. Insurance transacted with a qualifying captive in 2015 thus would be subject to tax under the amendment.

On March 10, 2015, House Minority Republican Leader Jim Durkin introduced House Bill 4193, which mirrors Senate Bill 1573 (as originally filed) in basically repealing the changes made last year by Public Act 98-978.

It remains to be seen whether either version of the Bill will gain traction in the Democratic-controlled General Assembly, which is struggling with a large state budget deficit that will increase substantially with the 2015 rollback of Illinois’ temporary income tax increase.

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Illinois Industrial Insured Self-Procurement Tax Guidance Announced

As we have previously covered in detail, at the end of its 2014 regular legislative session, the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements.  The law was enacted under the guise of technical corrections to the insurance code.

Historically, Illinois businesses meeting basic levels of sophistication and size were entitled to obtain coverage from nonadmitted insurers under an “industrial insured” exception to the general prohibition on transacting unauthorized insurance.  Senate Bill 3324, now Public Act 98-0978 (the Act), tightened the qualifying criteria for the industrial insured exception and imposed new taxes and fees totaling between 3.6 percent and 4.6 percent of premium—equivalent to those imposed on a policy procured by a surplus lines broker.  The potential financial impact has been estimated at upward of $100 million, falling squarely on large- and mid-sized companies headquartered in Illinois.  The affected business community was aghast when the surprising tax consequences were discovered, but its efforts to repeal the law in the General Assembly’s fall veto session proved unsuccessful.

The law now has come into effect, applying to policies effective on or after January 1, 2015.  The statute provides that reports are due to the Surplus Lines Association of Illinois within 90 days of the effective date of a policy, and so reports for calendar year policies must be filed by April 1, 2015.  Applicable taxes and fees are then due 30 days after the filing of the report.  The Department of Insurance has not yet provided any guidance on the new law, but the Surplus Lines Association of Illinois has updated its website with an online filing system for businesses subject to the tax.  Affected businesses must register and complete their online reports within the requisite 90-day deadline.  Reporting is on a policy-by-policy and transaction-by-transaction basis.  The system then calculates the applicable taxes and fees.  Once a transaction is submitted, the website instructs that Surplus Lines Association of Illinois will e-mail an invoice for its 0.1 percent association stamping fee, and the Illinois Department of Insurance will mail an invoice for the 3.5 percent premium tax and any applicable fire marshal tax.

It remains to be seen whether another, more successful effort to overturn the law will be undertaken during the 2015 legislative session.  In the interim, affected taxpayers are required to comply with the law’s filing requirements and will be assessed the new tax.

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