INCOME TAXES
The Company and subsidiaries file a consolidated federal income tax return, combined state income tax returns, and separate state franchise, income and premium tax returns, as applicable. The following table provides components of income tax expense (benefit):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 120.8 |
| | $ | 251.6 |
| | $ | 161.2 |
|
State | 14.2 |
| | 24.2 |
| | 11.3 |
|
| 135.0 |
| | 275.8 |
| | 172.5 |
|
Deferred: | | | | | |
Federal | (48.3 | ) | | 12.8 |
| | 42.9 |
|
State | 1.2 |
| | (1.2 | ) | | 2.1 |
|
| (47.1 | ) | | 11.6 |
| | 45.0 |
|
Total income tax expense | $ | 87.9 |
| | $ | 287.4 |
| | $ | 217.5 |
|
| | | | | |
A reconciliation of income tax at the statutory federal rate (currently 35% for the tax years presented) to income tax at the effective rate is as follows:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax expense at statutory federal rate | $ | 161.6 |
| | $ | 185.3 |
| | $ | 117.6 |
|
Adjustments resulting from: | | | | | |
State income tax, net of federal benefit | 11.7 |
| | 14.4 |
| | 9.5 |
|
Unrecognized tax benefits | (23.5 | ) | | 9.5 |
| | 3.5 |
|
Tax rate change | (56.1 | ) | | — |
| | — |
|
Non-deductible ACA industry fees | — |
| | 79.9 |
| | 79.6 |
|
Other, net | (5.8 | ) | | (1.7 | ) | | 7.3 |
|
Total income tax expense | $ | 87.9 |
| | $ | 287.4 |
| | $ | 217.5 |
|
| | | | | |
Our effective income tax rate on pre-tax income was 19.0% for the year ended December 31, 2017, compared with 54.3% and 64.7% for the years ended December 31, 2016 and 2015, respectively. The rate decline during 2017 was primarily driven by the tax rate change resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA”) during 2017, discussed below; the one-year moratorium on the non-deductible ACA industry fee for 2017; higher excess tax benefits resulting from the settlement of stock-compensation awards in 2017; and the favorable effect of the recognition of certain previously unrecognized tax benefits during 2017.
On December 22, 2017, President Trump signed the TCJA into legislation which, among other things, reduced the federal income tax rate for corporations from 35% to 21% effective on January 1, 2018. We are required to recognize the effect on deferred tax assets and liabilities of a change in tax rates in the period the tax rate change was enacted. We currently expect the enacted reduction in the U.S. corporate income tax rate, as well as other aspects of the new law, to result in a one-time, non-cash decrease to income tax expense of $56.1 million for the year ended December 31, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting relating to the TCJA under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
In connection with our initial analysis of the impact of the TCJA, we have recorded a provisional amount of net tax benefit of $56.1 million in the year ended December 31, 2017, related to the remeasurement of our deferred tax assets and liabilities and other effects. For various reasons including those discussed below, we have not fully completed our accounting for the income tax effects of the TCJA. As we were able to make reasonable estimates of the effects of the TCJA, we recorded provisional amounts. In connection with the adoption of the TCJA, we:
| |
• | Remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally at a federal rate of 21%. However, we are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Our financial statements include provisional amounts for the effects of deferred tax revaluation. |
| |
• | Evaluated the future deductibility of executive compensation due to the elimination of the performance-based exception as well as the modification of who is treated as a covered person in connection with limiting the deduction. As part of the TCJA, there is a transition rule for written, binding contracts in place prior to November 2, 2017 related to executive compensation, that have not been modified in any material respect. Further guidance is needed to determine the entire effect of these provisions. Our financial statements include provisional amounts for the effects of the changes to the deductibility of executive compensation. |
Once we finalize certain tax positions, we will be able to conclude whether any further adjustments are required to the net deferred tax liability balance. Any adjustments to these provisional amounts will be reported as a component of tax expense (benefit) in the reporting period in which any such adjustments are determined, which should be no later than the fourth quarter of 2018.
Significant components of our deferred tax assets and liabilities are: |
| | | | | | | |
| As of December 31, |
Deferred tax assets: | 2017 | | 2016 |
Net operating losses | $ | 24.7 |
| | $ | 11.2 |
|
Foreign tax credits | 22.0 |
| | — |
|
Medical and other benefits discounting | 18.7 |
| | 15.2 |
|
Allowance for doubtful accounts | 14.8 |
| | 19.2 |
|
Stock-based compensation | 14.1 |
| | 15.5 |
|
Unearned premium discounting | 3.1 |
| | 0.2 |
|
Capital losses | 9.9 |
| | — |
|
Premium deficiency reserve | 10.7 |
| | — |
|
Accrued expenses and other | 5.6 |
| | 11.3 |
|
Total deferred tax assets | 123.6 |
| | 72.6 |
|
Valuation allowance | (48.5 | ) | | (8.8 | ) |
Net deferred tax assets | 75.1 |
| | 63.8 |
|
Deferred tax liabilities: | | | |
Goodwill and other intangible assets | (101.1 | ) | | (47.3 | ) |
Software development costs and property and equipment | (56.7 | ) | | (68.0 | ) |
Prepaid assets | (10.7 | ) | | (11.9 | ) |
Total deferred tax liabilities | (168.5 | ) | | (127.2 | ) |
Net deferred tax liability | $ | (93.4 | ) | | $ | (63.4 | ) |
| | | |
The net deferred tax liability is calculated at 23.4% and 37% at December 31, 2017 and 2016, respectively, as the result of the TCJA.
Valuation allowances are provided when it is considered more-likely-than-not that deferred tax assets will not be realized. The valuation allowances relate to future benefits on certain state net operating loss carryforwards, capital loss carryforwards, and foreign tax credits which expire beginning with the 2018 tax year through 2037. As we were within the initial measurement period for the acquisition of Universal American, approximately $39.3 million of the valuation allowances recorded in 2017 were recorded as an adjustment to the opening balance sheet. These valuation allowances were subsequently revalued as a result of the TCJA to approximately $34.9 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
Unrecognized tax benefits, beginning of period | $ | 23.5 |
| | $ | 14.0 |
|
Increases: | | | |
Prior year tax positions | — |
| | 0.7 |
|
Current year tax positions | 3.5 |
| | 11.4 |
|
Decreases: | | | |
Prior year tax positions | (23.5 | ) | | (2.6 | ) |
Unrecognized tax benefits, end of period | $ | 3.5 |
| | $ | 23.5 |
|
| | | |
During April 2017, the IRS completed its audit of our 2015 consolidated income tax return, which effectively settled the 2015 tax year resulting in reversals of prior liabilities for unrecognized tax benefits in the amount of $4.9 million. In August 2017, the IRS approved our prior year refund claim with respect to this Internal Revenue Code section 162(m)(6) uncertain tax position. Based on our ongoing assessments of more-likely-than-not outcomes, this position was effectively settled for all years. The effect of the settlement regarding the current and prior year positions was recognized as a further reduction of income tax expense in the amount of $18.6 million.
We do not believe it is reasonably possible that our liability for unrecognized tax benefits will decrease in the next 12 months as a result of audit settlements.
We file our income tax returns in the U.S. federal jurisdiction and various states. We currently participate in the Compliance Assurance Program ("CAP") with the IRS, excluding the 2017 tax year. Under CAP, the IRS undertakes audit procedures during the tax year and as the return is prepared for filing. The IRS has concluded its CAP review of our 2015 tax return as well as all the prior years. We are no longer subject to state and local tax examinations prior to 2012. As of December 31, 2017, we are not aware of any material proposed adjustments.