1. Insurance Tax Update Sara Hendrix Tax Senior Director Grand Rapids, MI Mackenzie Satkoski Tax Manager Grand Rapids, MI April 22, 2015

2. Agenda Tax Technical Update ACA Provisions  162(m)(6) Compensation Deduction Limitation  Health Insurer Fee – Form 8963 New and Proposed Provisions  Tangible Property Regulations  Obama FY16 Budget Provisions specific to Insurance Questions Page 2

3. Tax Technical Update

4. Recent Court Cases Acuity Mutual Insurance Co. v. Commissioner, TC Memo 2013-209 ­Tax Court ruled in favor of taxpayer ­Acuity supplied substantial evidence to support position and IRS did not ­Again, looked to NAIC approved annual statement for starting point Page 4

5. Recent Court Cases Acuity Mutual Insurance Co. v. Commissioner, TC Memo 2013-209 ­Take-away: Memorandum decision but reinforces the court’s reliance on documentation to support position that loss reserves are ‘fair and reasonable’ and makes it more difficult for the IRS to argue otherwise Page 5

6. Recent Court Cases State Farm v. Commissioner, No. 11–3478 ­Seventh Circuit in US Court of Appeals did not allow bad-faith damage award that was punitive as part of loss reserves ­Portion of award related to compensatory was included in loss reserves ­Court largely followed the NAIC guidance Page 6

7. Recent Court Cases New York Life v. United States, No. 11–2394 ­Second Circuit Court affirmed district court decision that deductions for policyholder dividends did not satisfy the “all-events” test under IRC 461 ­New York Life deducted two types of dividends Annual dividend mandated by state law; credited but not paid until PH anniversary date Voluntary termination dividend accrued but no paid until death, maturity, or surrender Page 7

8. Recent Court Cases Mass Mutual Life v. United States, No. 07-648T ­U.S. Court of Claims; nearly identical facts as NY Life ­Court applied standard of deductibility that requires absolute liability rather than absolute discharge through payment Court viewed Board approval of guaranteed dividend prior to year end as an established liability, deductible in the year of adoption and resolution Court held that PH dividends qualified as recurring and satisfied the “all- events” test ­Takeaway Page 8

9. Section 162(m)(6) Compensation Deduction Limitation

10. IRC Section 162(m)(6) Enacted as part of the Affordable Healthcare Act in 2010. Final IRS regulations were issued in September 2014. Provides for a $500,000 limit on compensation deductions for tax year beginning on or after January 1, 2013 for “Covered Health Insurance Providers” (CHIPs). Deduction limitation applies to both current and deferred compensation arrangements paid or vested in 2013 or later (discussed later in more detail). Page 10

11. IRC Section 162(m)(6) Section 162(m)(c)(6) defines a CHIP as any employer that is a “health insurance issuer” as defined under IRC Section 9832(b)(2) who receives at least 25% of gross premiums from providing health insurance coverage defined as “minimum essential coverage.” A “health insurance issuer” is defined as an insurance company, service or organization (including HMO) that is licensed to engage in the business of insurance in a state and subject to state law which regulates insurance. Page 11

12. IRC Section 162(m)(6) Deferred Compensation: 162(m)(6) limitation applies to deferred compensation attributable to services performed in a taxable year beginning after December 31, 2009 that is otherwise deductible in a taxable year beginning after December 31, 2012 Any unused $500,000 limitation on deferred compensation maybe carried forward to the taxable year in which such compensation is otherwise deductible Page 12

13. IRC Section 162(m)(6) De Minimis Exception: A health insurance issuer and any member of its aggregated group are not considered to be CHIPs if the premiums received by the health insurance issuer(s) in the group are less than 2% of the total gross revenue of the aggregated group Subsequent year transition period for de minimis exception Aggregate Group Rules Final regulations example Page 13

14. Health Insurance Provider Fee – Form 8963

15. Health Insurance Provider Fee Enacted as part of the Affordable Healthcare Act in 2010. Known as the “Insurer Fee”, this fee is applies to health insurance issuers. Beginning in 2014, health insurance issuers will pay an annual fee based on their net written premiums. Similar definitions and exclusions apply to this fee as is applied to the 162(m)(6) provisions Fee is non-deductible for income tax purposes Fee is being used to fund premium tax subsidies for low-income taxpayers from purchased coverage via health exchange Page 15

16. Health Insurance Provider Fee The criteria for the fee is as follows:  Less than $25M premiums – not subject to fee  Between $25M and $50M premiums – 50% of premiums subject to fee  Over $50M in premiums – 100% subject to fee Different rates apply to tax-exempt insurers Government will issue the revenue needed to be raised by these fees on an annual basis. 2015 revenue = $11.3 Billion Insurers report annual net written premiums to the IRS via Form 8963. Due to IRS by April 15 each year. Amount of fee will be determined and notified by August 31, payment due September 30 each year Page 16

17. New and Proposed Tax Legislation – Insurance Industry

18. New Tax Laws Tangible Property Regulations ­Final regulations issued September 2013 ­Effective January 1, 2014 Early adopt for 2012 and 2013 ­Goal was to simplify and provide more guidance Page 18

19. New Tax Laws Tangible Property Regulations – Main Focus ­Materials and Supplies (1.162-3) ­Repairs and Maintenance (1.162-4) ­Capital Expenditures (1.263(a)-1) ­Amounts paid for the acquisition or production of tangible property (1.263(a)-2) ­Amounts paid for the improvement of tangible property (1.263(a)-3) Page 19

20. New Tax Laws Tangible Property Regulations – De Minimis Capitalization ­Safe harbor at the invoice or item level ­$5,000 per invoice or item, if applicable financial statement ­$500 per invoice or item, if no applicable financial statement Page 20

21. New Tax Laws Tangible Property Regulations – Transition ­IRS expects that nearly all companies will have a change in their accounting method ­Transition guidance was issued in early 2014 in Revenue Procedure 2014-16 and 2014-17 ­How to apply the regulations for years prior to 2014 ­Change of accounting procedures Page 21

22. Proposed Tax Laws Obama FY 2016 Budget – many provisions repeated from FY15 Budget ­Top corporate tax rate 28% ­Provision to limit deductions for reinsurance paid by a US insurance company to its foreign affiliates Denial of deduction for reinsurance premiums paid to the extent the foreign reinsurer is not subject to U.S. income tax with respect to premiums received. ­Imposition of “Financial Crisis Responsibility Fee” on financial entities, including insurance companies, with worldwide consolidated assets in excess of $50 billion. Fee based on covered liabilities Page 22

23. Proposed Tax Laws Camp Tax Reform Discussion Draft ­Similar corporate rate reduction from Obama proposal – 25-28% ­Involves “base broadening” to provide revenue neutral impact on rate reduction ­Several provisions specific to life insurance industry include substantial increase to Tax DAC capitalization rates, lower tax reserve discount rates, further reduction of DRD, changes in carryback provisions to mirror non-life companies Page 23

24. Questions?

25. Questions & Answers For additional questions please contact: Sara Hendrix Tax Senior Director shendrix@bdo.com (616) 802-3482 Mackenzie Satkoski Tax Manager msatkoski@bdo.com (616) 802-3380 Page 25