Insurance corporations are not, and never have been, subject to the New York City general corporation tax. Prior to July 1, 1974, they were subject to the former City insurance corporation tax and exempt from the general corporation tax (“GCT”). When the City insurance tax was repealed in 1974 – and even though the Administrative Code no longer contained an exemption from GCT for insurance corporations – the exemption for insurance corporations remains in effect because of language in the GCT enabling legislation, which has never been amended. A recent decision of a New York City Administrative Law Judge addresses the scope of this exemption with respect to health maintenance organizations (“HMOs”), and concludes that the HMOs in question were “doing an insurance business” and therefore were not includable in a combined GCT return. Matter of Aetna, Inc., TAT(H) 12-3(GC) and TAT(H) 12-4(GC) (N.Y.C. Tax App. Trib., Admin. Law Judge Div., July 22, 2014).

Facts. Aetna, Inc. is a holding company that during the years in issue (2005 and 2006) owned approximately 28 HMO subsidiaries. Under the “IPA” HMO business model employed by Aetna’s HMOs, unrelated physicians come together in an organization that represents their interests in negotiating with the HMO regarding reimbursement and other matters. The physicians provide the medical services to the HMO members; the physicians are not employees of the HMO.

For the years in issue, Aetna filed combined GCT returns that included those HMO subsidiaries. Aetna later filed $1.1 million in GCT refund claims, taking the position that its HMO subsidiaries were doing an insurance business, and therefore should not have been included in its combined GCT returns. The Department of Finance denied the refund claims on the grounds that the HMOs are not insurance companies, and therefore are properly includable in Aetna’s combined GCT return. This litigation ensued.

Issue.  The GCT enabling legislation (Laws of 1966, ch. 772, Model Act § 41.4) defines an “insurance corporation” to include a corporation “doing an insurance business in this state.”  As noted above, although the City insurance corporation tax was repealed in 1974, the 1966 GCT Model Act was never amended to remove the exemption for insurance corporations.  The GCT regulations also prohibit the inclusion of insurance corporations in a combined GCT return.  19 RCNY 11- 92(c).  At issue here is whether Aetna’s HMOs are doing an insurance business in the State.  If they are, then they are exempt from the GCT, and cannot be included in a combined GCT return.

Decision. The ALJ concluded that the HMOs are doing an insurance business in the State, and therefore cannot be included in a combined GCT return. The decision contains a detailed analysis of the federal and New York State treatment of HMOs, for both regulatory and tax purposes. The ALJ acknowledged that HMOs have been distinguished from traditional insurers on the grounds that there is no risk shifting to an HMO because the HMO provides prepaid medical services to its members, rather than indemnifying its members for the costs of medical care, as a traditional insurer does. In a federal regulatory decision that the ALJ appeared to consider significant, Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002), the U.S. Supreme Court held that an HMO provided health care as an insurer, and was therefore subject to Illinois insurance regulation, which was not preempted by ERISA.

As for New York State law, the ALJ pointed out that HMOs are regulated under the State Public Health Law and various provisions of the State Insurance Law.  Although an Advisory Opinion issued by the Department of Taxation and Finance (Petition of KPMG Peat Marwick, Advisory Opinion, TSB-A-93(4)C (N.Y.S. Dep’t of Taxation & Fin., Jan. 12, 1993)) concluded that a business conducted by an HMO in compliance with Article 44 of the New York State Public Health Law is not considered an insurance business, the ALJ noted that this Advisory Opinion predated the Supreme Court decision in Rush, suggesting that it may no longer be viable.

The Department pointed out that in 2009, State Tax Law § 1502-a was amended specifically to add HMOs to the definition of an “insurance corporation.” The Department argued that if HMOs were truly regarded as “doing an insurance business” in New York, there would have been no need to specifically refer to HMOs in the 2009 amendments. The Department maintained that the amendments demonstrated that HMOs were not regarded as doing an insurance business during the years in issue, before the 2009 amendments. The ALJ rejected this argument as going “beyond the literal reading of the 2009 amendments,” particularly since HMOs were subject to considerable State insurance regulation prior to those amendments.

According to the ALJ, while tax exemptions must be strictly construed against the taxpayer, the Department’s narrow interpretation defeated the purpose of the GCT exemption under the Model Act. The ALJ concluded that Aetna’s HMOs were doing an insurance business in the State, and therefore the Department erred in refusing to remove them from Aetna’s combined GCT returns.

Additional Insights

It is somewhat surprising that the issue of whether HMOs are exempt from GCT has not been addressed until now. The decision does not mention how the HMOs filed for federal and State tax purposes.  The ALJ’s analysis of the federal and New York State precedent made clear that HMOs, while perhaps not traditional insurance companies, are subject to considerable regulation as insurers.  If upheld, the decision could have beneficial implications for captive insurance companies, which have come under attack by both the State and City allegedly for not providing true insurance.  Similar to the HMOs, captive insurance companies are also subject to considerable non-tax state regulation.  Finally, it is possible that the City of New York could attempt to address this issue by seeking to amend the GCT Model Act to eliminate the insurance corporation exemption.