STATE REGULATION : Taxation

Every state levies a premium tax on out-of-state insurance companies licensed to do business in its state, and most states tax the premiums of insurance companies domiciled in their state. These taxes, which are applicable to premiums written within a state, average about 2 percent.

The imposition of the premium tax has placed insurance companies at a competitive disadvantage with alternative methods of providing benefits. Premiums paid to HMOs are not subject to the tax, nor are premiums paid to Blue Cross and Blue Shield plans in some states. In addition, the elimination of this tax is one cost saving under self-funded plans. Because the trend toward self-funding of benefits by large corporations has resulted in the loss of substantial premium tax revenue to the states, there have been suggestions that all premiums paid to any type of organization or fund for the purpose of providing insurance benefits to employees be subject to the premium tax.

Where state income taxation exists, the tax implications of group insurance premiums and benefits to both employers and employees are generally similar to those of the federal government. Employers may deduct any premiums paid as business expenses, and employees have certain exemptions from taxation with respect to both premiums paid on their behalf and benefits attributable to employer-paid premiums.

Regulatory Jurisdiction
A group insurance contract will often insure individuals living in more than one state—a situation that raises the question of which state or states have regulatory jurisdiction over the contract. The issue is a crucial one because factors such as minimum enrollment percentages, maximum amounts of life insurance, and required contract provisions vary among the states.

Few problems usually arise if the insured group qualifies as an eligible group in all the states where insured individuals reside. Individual employer groups, negotiated trusteeships, and labor union groups fall into this category. Under the doctrine of comity, by which states recognize within their own territory the laws of other states, it is generally accepted that the state in which the group insurance contract is delivered to the policyholder has governing jurisdiction. Therefore, the contract must conform only to the laws and regulations of this one state, even though certificates of insurance may be delivered in other states. However, a few states have statutes that prohibit insurance issued in other states from covering residents of their state unless the contract conforms to their laws and regulations. While these statutes are effective with respect to insurance companies licensed within the state (that is, admitted companies), their effectiveness with respect to nonadmitted companies is questionable, because states lack regulatory jurisdiction over these companies.

This does not mean that the policyholder may arbitrarily seek out a situs (place of delivery) that is most desirable from a regulatory standpoint. Unless the place of delivery has a significant relationship to the insurance transaction, other states may seek to exercise their regulatory authority. Therefore, it has become common practice that an acceptable situs must be at least one of the following:

- The state where the policyholder is incorporated (or the trust is created if the policyholder is a trust)

- The state where the policyholder's principal office is located

- The state where the greatest number of insured individuals are employed

- Any state where an employer or labor union that is a party to a trust is located

While a policyholder may have a choice of situs if these locations differ, most insurers are reluctant to issue a group contract in any state unless a corporate officer or trustee who can execute acceptance of the contract is located in that state and unless the principal functions related to the administration of the group contract will be performed there.

The issue of regulatory jurisdiction is more complex for those types of groups that are not considered to be eligible groups in all states. METs are a typical example. If the state has no regulation to the contrary and if the insured group would be eligible for group insurance in other states, the situation is the same as previously described. In addition, most other states will accept the doctrine of comity and not interfere with the regulatory jurisdiction of the state where the contract is delivered. However, some states either prohibit coverage from being issued or require that it conform with the state's laws and regulations other than those pertaining to eligible groups.