Does a county's employee health insurance trust lose its Texas premium tax exemption if it does more than just pay premiums?

TX AG Opinion GA-0739: Does a county employee benefit trust keep its insurance premium tax exemption?

Plain-English summary

Caldwell County set up a single nonprofit trust to pay for its employees' group health and related benefits, as the Local Government Code allows. When the trust negotiated rates with an insurance company, it told the company it should not pass through the cost of insurance premium taxes, because the trust qualified for a statutory exemption. The insurance company checked with the Comptroller, who informally indicated the exemption would probably not apply. The Caldwell County Criminal District Attorney, Richard R. Hicks III, asked the Attorney General to weigh in.

Insurance Code section 222.002 taxes insurers on the gross premiums they receive, but exempts premiums paid on group health, accident, and life policies by a "single nonprofit trust" established to provide coverage primarily for employees of a municipality, county, or hospital district. The Legislature never defined "single nonprofit trust," and there was no case law or rule interpreting it. The Comptroller read it to require a trust used for a single purpose, paying premiums. The opinion accepted that a "single purpose" reading is reasonable.

The problem was how narrowly the Comptroller applied it. The Comptroller objected to provisions of the Caldwell County trust that gave trustees errors-and-omissions coverage, let trustees acquire and manage property, and made trust funds available for professional services and for judgments or settlements from litigation against the trust, treating those as exceeding the single purpose. But the opinion pointed out that those are ordinary trustee powers expressly recognized in the Property Code: buying insurance to protect the trust and trustee, investing trust property, employing attorneys and agents, and reimbursing expenses of administration. Nothing in section 222.002 limits trust funds to paying premiums alone, and the Legislature's stated reason for the exemption was that local governments are already exempt from various state taxes and should not have to pay premium tax on employee insurance.

So the opinion concluded that as long as those trustee powers are used to further the purpose of providing insurance coverage for employees and their dependents, they are not contrary to the limits on a section 222.002(c)(5) trust, and a court would likely find the Caldwell County trust complies and is entitled to the premium tax exemption.

Currency note

This opinion was issued in 2009. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Insurance Code section 222.002, the Local Government Code trust provision, and the Property Code trustee-power provisions may have been amended since 2009. Confirm current law before relying on anything below.

Who this opinion affected (as of 2009)

Counties, cities, and hospital districts with employee benefit trusts: The opinion described their single nonprofit trusts as still eligible for the premium tax exemption even when the trust exercises ordinary trustee powers beyond writing premium checks, so long as those powers serve the insurance-coverage purpose.

Insurance companies and the Comptroller: The opinion explained that the Comptroller's "single purpose" reading was reasonable, but that applying it to allow only premium payments was too narrow and at odds with the Legislature's intent.

Public employees and their dependents: The opinion described the exemption as designed to spare local governments the premium tax on employee insurance, which the trust structure is meant to deliver.

Common questions

What is the premium tax exemption for?
The opinion explained that section 222.002(c)(5)(A) exempts premiums paid on group health, accident, and life policies by a single nonprofit trust set up to cover employees of a county, municipality, or hospital district, reflecting the Legislature's view that local governments should not pay premium tax on employee insurance.

Does the trust lose the exemption if it invests funds or hires lawyers?
Not according to the opinion. Those are ordinary trustee powers under the Property Code, and using them to further the insurance-coverage purpose does not violate the limits on a section 222.002 trust.

Was the Comptroller's reading wrong?
The opinion called the Comptroller's "single purpose" interpretation reasonable, but said the Comptroller applied it too narrowly by treating the trust as able only to pay premiums, which conflicts with the statute and the Legislature's intent.

Did the opinion guarantee the exemption applies?
No. It concluded a court would likely find the Caldwell County trust complies, to the extent the challenged powers are ordinary trustee powers used to further the purpose of providing employee insurance coverage.

Background and statutory framework

Section 222.002 taxes insurers on gross premiums but exempts premiums paid by a single nonprofit trust established to cover employees of a municipality, county, or hospital district (Tex. Ins. Code Ann. § 222.002(a)-(b), (c)(5), (c)(5)(A) (Vernon 2009)), and the Comptroller administers and enforces the tax (id. § 201.051(a)). Commissioners courts may establish such a trust (Tex. Loc. Gov't Code Ann. § 157.102 (Vernon 2008)). The Legislature did not define "single nonprofit trust," so the opinion read "single" by common usage (Tex. Gov't Code Ann. § 311.011(a) (Vernon 2005)) and accepted the Comptroller's single-purpose interpretation as reasonable, while rejecting the narrower premiums-only application.

The trust features the Comptroller challenged are ordinary trustee powers under the Property Code: purchasing insurance to protect the trust and trustee, investing trust property, employing attorneys and agents, and reimbursing administration expenses (Tex. Prop. Code Ann. §§ 113.013, 113.006, 113.018, 114.063 (Vernon 2007)), powers that may be limited only by the trust instrument, court order, or statute (id. § 113.001). Used to further the insurance-coverage purpose, they are not contrary to the section 222.002(c)(5) limits, and courts do not defer to an unreasonable agency reading (In re Am. Homestar of Lancaster, Inc., 50 S.W.3d 480, 490-91 (Tex. 2001)).

Citations

Statutes:

• Tex. Ins. Code Ann. §§ 222.002(a)-(b), (c)(5), (c)(5)(A), 201.051(a) (Vernon 2009)
• Tex. Loc. Gov't Code Ann. § 157.102 (Vernon 2008)
• Tex. Gov't Code Ann. § 311.011(a) (Vernon 2005)
• Tex. Prop. Code Ann. §§ 113.001, 113.006, 113.013, 113.018, 114.063 (Vernon 2007)

Cases:

• In re Am. Homestar of Lancaster, Inc., 50 S.W.3d 480 (Tex. 2001)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0739
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2009/ga0739.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

September 8, 2009

The Honorable Richard R. Hicks III
Caldwell County Criminal District Attorney
Post Office Box 869
Lockhart, Texas 78644

Opinion No. GA-0739

Re: Whether premiums paid for group health insurance by the Caldwell County Employee Benefit Trust are subject to insurance premium taxes under section 222.002 of the Insurance Code (RQ-0787-GA)

Dear Mr. Hicks:

You ask whether "premiums paid for group health insurance by the Caldwell County Employee Benefit Trust (the "Trust") [are] subject to insurance premium taxes under Texas Insurance Code section 222.002."[1] Section 222.002 requires insurers to pay an annual tax on the gross premiums they receive on life, accident, or health insurance policies. See TEX. INS. CODE ANN. § 222.002(a)-(b) (Vernon 2009). In determining an insurer's taxable gross premiums, the Legislature has exempted "premiums or revenues paid on group health, accident, and life policies or contracts in which the group covered by the policy or contract consists of a single nonprofit trust established to provide coverage primarily for employees of ... a municipality, county, or hospital district in this state." Id. § 222.002(c)(5)(A).

The Legislature has expressly authorized commissioners courts to establish a single nonprofit trust to "pay for the group health and related benefits." TEX. LOC. GOV'T CODE ANN. § 157.102 (Vernon 2008). You explain that pursuant to section 157.102, Caldwell County has "created a fund in the form of a single nonprofit trust" and that "[i]n negotiating with the health insurance company ... for rates for health insurance benefits, the Trust advised the health insurance company that it was not necessary for the Company to pass through the cost of premium taxes" to the Trust because the exemption in subsection 222.002(c)(5)(A) would apply. Request Letter at 1. However, the insurance company separately requested advice from the Texas Comptroller of Public Accounts ("Comptroller") regarding whether the exemption would apply and was informally advised that it would not likely apply in this case. Id. at 1-2. You therefore ask us to provide an opinion on whether the Trust qualifies as a single nonprofit trust under subsection 222.002(c)(5)(A) such that an insurance company would not be taxed on premiums the Trust pays for health, accident, and life insurance. Id. at 1.

The Legislature has directed the Comptroller to "administer and enforce the provisions of [the Insurance Code] and other insurance laws of this state that relate to the administration, collection, and reporting of taxes and certain fees and assessments imposed" thereunder. TEX. INS. CODE ANN. § 201.051(a) (Vernon 2009). Construing the subsection 222.002(c)(5)(A) exemption, the Comptroller's office interprets the phrase "single nonprofit trust" as "requiring a trust established for the single purpose of paying premiums and one that does not inure to the benefit of any individual."[2] In response to the insurance company's inquiry about whether the Trust would qualify for the subsection 222.002(c)(5)(A) exemption, the Comptroller's office concluded that "the Trust ... does not appear to meet the qualifications necessary to exclude the premiums paid out of this trust from the premium tax base." See Request Letter, Attachment C at 2. The Comptroller's office further explained that "[s]ome of the trust's provisions exceed the single purpose necessary to qualify for exemption from the premium tax." Id. Specifically, it pointed to provisions that provide errors and omissions coverage for trustees, authorize trustees to acquire and manage property, and make Trust funds available for professional services and judgments or settlements arising out of litigation against the Trust. Id.

The Legislature has not defined single nonprofit trust, and we have not found any Texas case law or administrative rules interpreting the phrase. As the Comptroller's office recognizes, "there is no good guidance on how this provision ... should be interpreted." Comptroller's Brief at 2. It is unclear what the Legislature meant by using the word single to modify the word trust. Single, when used as an adjective, can have multiple meanings, including "unaccompanied by others," or "consisting of or having only one part, feature, or portion." MERRIAM-WEBSTER'S COLLEGIATE DICTIONARY 1163 (11th ed. 2004); see TEX. GOV'T CODE ANN. § 311.011(a) (Vernon 2005) (phrases construed according to common usage). Thus, the Legislature may have meant that each municipality, county, and hospital district may create one single trust to pay for the insurance of all employees, or it may have intended for the trust to have one single purpose, providing insurance coverage for employees and their dependents. Although the phrase single nonprofit trust could have multiple meanings, we conclude that the Comptroller's interpretation, requiring that the Trust be used for a single purpose, is a reasonable one.

Whether the Comptroller too narrowly applies that interpretation to mean that Trust funds may be used only for paying premiums is a separate question. While the Legislature made it clear that, in order to receive the premium tax exemption, the trust must be "established to provide coverage primarily for employees," nothing in the statute limits the use of the trust funds solely for paying insurance premiums.[3] TEX. INS. CODE ANN. § 222.002(c)(5) (Vernon 2009). The features of the Trust that the Comptroller challenges are statutorily-recognized powers of a trustee. Chapter 113, Subchapter A of the Texas Property Code specifically authorizes a trustee to: "purchase insurance of any nature, form, or amount to protect the trust property and the trustee"; "invest and reinvest in property of any character"; "employ attorneys [and other agents] reasonably necessary in the administration of the trust estate"; and "reimburse himself from trust principal or income or partly from both for ... expenses incurred while administering or protecting the trust." TEX. PROP. CODE ANN. §§ 113.013 (Vernon 2007) (insurance); 113.006 (general authority to manage and invest trust property); 113.018 (employment of agents); 114.063 (general right to reimbursement). While these powers can be revoked by "the instrument creating the trust, a subsequent court order, or another" statute, we find nothing to indicate that the Legislature intended to limit these powers in a trust created under section 222.002. See id. § 113.001 (powers of trustee can be limited by trust document, court order, or statute). As long as these powers are used to further the purpose of paying insurance premiums for employees and their dependents, they are not contrary to the limitations placed on a trust created under subsection 222.002(c)(5).

Furthermore, in adopting section 222.002, the Legislature noted that local governments "are exempt from the state sales tax, franchise tax, and motor vehicle tax, and there is no reason they should pay a premium tax on municipal employees' insurance policies." HOUSE STUDY GROUP, BILL ANALYSIS, Tex. H.B. 1785, 67th Leg., R.S. (1981). The Comptroller's narrow application of the phrase single nonprofit trust to include only those trusts solely used to pay insurance premiums is at odds with the Legislature's intent to exempt local governments from payment of the premium tax.[4] See In re Am. Homestar of Lancaster, Inc., 50 S.W.3d 480, 490-91 (Tex. 2001) (orig. proceeding) (courts do not defer to an agency's interpretation of a statute if the interpretation is unreasonable or at odds with the plain language of the statute).

Thus, to the extent that the challenged powers of the Caldwell County Trust are generally recognized powers of a trustee that are necessary to protect and operate the Trust and are used to further the purpose of providing insurance coverage for employees and their dependents, we believe a court would find the Trust complies with subsection 222.002(c)(5)(A) and should be subject to the premium tax exemption.

SUMMARY

Subsection 222.002(c)(5)(A) of the Insurance Code creates a tax exemption for certain premiums paid on group health, accident, and life insurance policies by a single nonprofit trust established to provide coverage for employees of municipalities, counties, or hospital districts. The Legislature has not defined the term single nonprofit trust, and the Comptroller of Public Accounts, as the agency charged with administering and enforcing the premium tax statute, has interpreted the term to mean a trust established for the single purpose of paying insurance premiums. Although the Comptroller's construction of this ambiguous phrase is reasonable, the Comptroller is too narrowly defining single purpose such that the trust can only pay insurance premiums. As long as the trust funds are used to further the purpose of providing insurance coverage for employees and their dependents, their use is not contrary to the limitations placed on a trust created under subsection 222.002(c)(5)(A).

Very truly yours,

ANDREW WEBER
First Assistant Attorney General

JONATHAN K. FRELS
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Virginia K. Hoelscher
Assistant Attorney General, Opinion Committee

[Footnote 1: Request Letter at 1 (available at http://www.texasattorneygeneral.gov).]

[Footnote 2: Brief from Martin Cherry, General Counsel, Texas Comptroller of Public Accounts, at 3 (Apr. 27, 2009) (on file with the Opinion Committee) [hereinafter "Comptroller's Brief"].]

[Footnote 3: Letters from the Comptroller's office have advised that "[o]ther than the payment of trust fees and expenses related to the funding of group benefits for employees and retirees, no other expenses may be paid from such a trust." Comptroller's Brief, Attachment B at 6 (emphasis added). However, those letters have also advised local governments "to make all payments for taxes and administration expenses from outside of the trust." Id. at 5.]

[Footnote 4: Although the Comptroller's Brief argues that the Legislature's intent in enacting section 222.002 was "to maximize fund assets to pay for certain types of insurance," it does not direct us towards any authority that supports that intent, nor have we been able to find any. See Comptroller's Brief at 3.]