What does Illinois General Information Letter IT 23-0001-GIL conclude about Base Income; Modifications?

Plain-English summary

An insurance company that sells only Medicare Title XVIII (Medicare Advantage, also called "Medicare+Choice") premiums asked the Illinois Department of Revenue whether federal law exempts its Medicare premium income from Illinois income tax. The company pointed to 42 U.S.C. § 1395w-24 (Section 1854(g) of the Medicare Act), which says "No state may impose a premium tax or similar tax with respect to payments to Medicare+Choice organizations."

The Department ruled that Illinois income tax is not a "premium tax or similar tax" within the meaning of that federal statute, so the federal preemption does not exempt Medicare premium income from Illinois income tax. Illinois income tax is a broad, general tax on net income (computed by starting from federal taxable income and applying only specific listed addition/subtraction modifications), not a tax imposed specifically on premiums the way an insurance privilege tax is. Because the federal exemption doesn't reach it, the insurer must include its Medicare premium income in Illinois base income and may not subtract it out.

The Department distinguished two out-of-state court decisions the requester may have had in mind: Health Net Life Ins. Co. v. Dep't of Revenue (Oregon), which held Oregon's minimum tax was a "premium tax or similar tax" and therefore preempted, and Group Health Cooperative v. Department of Revenue (Washington), which held Washington's business and occupation tax was "similar" to a premium tax. Illinois's income tax was distinguished from both: it is a general net-income tax that applies broadly across business activity, not a tax keyed to premiums.

Since the premium income remains fully taxable in Illinois, the company's second question (whether it must add back federal deductions tied to that income) never arises. Because the income stays includible in base income, the related expenses may still be properly deducted against it — no addback modification is required under IITA Section 203(h).

What this means for you

Insurance companies selling Medicare Advantage / Medicare+Choice plans

Don't assume the federal premium-tax preemption in 42 U.S.C. § 1395w-24 shields your Medicare Advantage premium income from Illinois income tax — it doesn't. That preemption only reaches taxes that are, in substance, "premium taxes" (like Illinois's own insurance privilege tax under 215 ILCS 5/409(1), which does exempt these premiums). Illinois's general net-income tax is a different animal and still applies. Keep including Medicare Advantage premiums in base income, and continue apportioning insurance company income under IITA Section 304(b)(1) using direct premiums written.

Insurance-industry tax accountants and attorneys

Because the premium income isn't exempt, there is no mismatch between income and expenses to correct — you don't need to hunt for an addback provision, because none applies. If you're relying on out-of-state authority like the Oregon Health Net Life or Washington Group Health Cooperative decisions to argue for exemption from Illinois's income tax, be aware the Department has already distinguished both: those cases involved taxes the courts found were premium-based in substance, unlike Illinois's broad net-income tax.

Common questions

Q: Does the federal Medicare Act's premium-tax preemption exempt Medicare Advantage premiums from Illinois income tax?
A: No. The Department concluded Illinois income tax is not a "premium tax or similar tax" under 42 U.S.C. § 1395w-24, so the federal prohibition doesn't apply to it.

Q: Are Medicare+Choice/Medicare Advantage premiums exempt from any Illinois tax?
A: Yes, but only from the Illinois Insurance Code's premium-based privilege tax under 215 ILCS 5/409(1), which is a different tax than the income tax addressed in this letter.

Q: If the premium income is taxable, does the insurer have to add back related expenses deducted at the federal level?
A: No. Since the premium income stays in Illinois base income and is not subtracted out, the related expenses remain properly matched deductions against taxable income; IITA Section 203(h) does not require any addback.

Q: How is an insurance company's income apportioned to Illinois?
A: Under IITA Section 304(b)(1) and 86 Ill. Adm. Code Section 100.3420, using a fraction of direct premiums written for insurance on property or risk in Illinois over direct premiums written everywhere.

Q: Is this letter binding on the Department?
A: No. It is a General Information Letter (GIL), which provides general information but is not a statement of Department policy and is not binding on the Department.

Citations and references

Illinois statutes and rules:

• IITA § 201(a) (income tax on corporations' privilege of earning/receiving income)
• IITA § 201(c) (personal property replacement tax on net income)
• IITA § 202 (definition of net income)
• IITA § 203(b)(1)-(2) (definition of base income; addition/subtraction modifications)
• IITA § 203(e) (definition of taxable income)
• IITA § 203(h) (no modifications except as expressly provided)
• IITA §§ 301(c)(2), 303 (allocation of nonbusiness income)
• IITA § 304(b)(1) (apportionment of insurance company income by direct premiums written)
• 86 Ill. Adm. Code § 100.3420(b), (c)(1)-(3), (d) (insurance company apportionment rules)
• 215 ILCS 5/409(1) (Illinois Insurance Code privilege tax on premiums)

Federal statutes and regulations:

• 42 U.S.C. § 1395w-24, Medicare Act Sec. 1854(g) (prohibition of state premium taxes on Medicare+Choice payments)
• 42 U.S.C. § 1395w-26(b)(3), Medicare Act Sec. 1856(b)(3) (relation to state laws)
• 42 C.F.R. § 422.404 (state premium taxes prohibited)

Cases discussed (out-of-state, distinguished):

• Health Net Life Ins. Co. v. Dep't of Revenue, 24 OTR 514 (Or. T.C. 2021)
• Group Health Cooperative v. Department of Revenue, 8 Wash. App. 2d 210, 438 P.3d 158 (2019)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2023/IT23-0001-gil.pdf

Original ruling text

IT-23-0001-GIL 03/21/2023 BASE INCOME; MODIFICATIONS
Explanation of the Illinois income tax treatment of Medicare Title XVIII premiums
and related expenses. (This is a GIL.)
March 21, 2023
NAME
Tax Senior Manager
COMPANY
ADDRESS
Re: Illinois Income Tax – Taxability of Medicare XVIII Premiums
Dear XXX:
This is in response to your email dated December 4, 2022, in which you request
information regarding the taxability of Medicare Title XVIII premiums under Illinois law.
The nature of your request and the information you have provided require that we
respond with a General Information Letter (“GIL”), which is designed to provide general
information, is not a statement of Department policy, and is not binding on the
Department. See 2 Ill. Adm. Code Section 1200.120(b) and (c), which may be found on
the Department’s website at www.tax.illinois.gov.
Your letter states as follows:
I have a client that is an insurance company solely selling Medicare Title
XVIII premiums. It is our understanding that under Section 1854(g) of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(attached), these premiums are exempt from state income and premium
taxes. The act states: “No state may impose a premium tax or similar tax
with respect to payments to Medicare+Choice organizations under section
1853.” I am interpreting this language to mean the state cannot impose tax
on income generated from these Medicare premiums if they meet the
guidelines. However, under federal law these premiums are subject to
taxation. I would like to confirm that my client will need to subtract the
Medicare premium income that falls under the federal act from its federal
taxable income to reach its Illinois taxable income.
Assuming we do subtract this income from our federal taxable income,
does Illinois require us to add back any related expenses deducted at the
federal level? Since this income is taxable at the federal level, related
expenses are deducted to reach our federal taxable income. However, if
Illinois does not tax this income, do we need to add back the expenses
originally deducted at the federal level? I could not find any Illinois
guidance requiring these expenses to be added back but want to confirm.
If we do have to add back these expenses, can you please direct me to
that guidance for my own reference and review.

COMPANY/NAME
Page 2
March 21, 2023
If there is a more appropriate IDOR representative, with whom to review
this question, please let me know and I will reach out. Thank you in
advance for your time and attention to this question.
RULING
Section 201(a) of the Illinois Income Tax Act (“IITA”, 35 ILCS 5/101 et seq.) imposes a
tax measured by net income on corporations on the privilege of earning or receiving
income in or as a resident of Illinois. In addition, Section 201(c) of the IITA imposes a
second tax (the personal property tax replacement income tax) measured by net income
on corporations (including Subchapter S corporations), partnerships, and trusts on the
privilege of earning or receiving income in or as a resident of Illinois.
For most corporations, the starting point in calculating “net income” for purposes of IITA
Section 201 is to first calculate the taxpayer’s Illinois base income. IITA Section
203(b)(1) defines “base income” in the case of a corporation as an amount equal to the
taxpayer’s taxable income, adjusted for certain statutorily prescribed addition and
subtraction modifications under IITA Section 203(b)(2). IITA Section 203(e) defines
“taxable income” as the amount of taxable income properly reportable for federal
income tax purposes for the taxable year under the provisions of the Internal Revenue
Code (“IRC”). IITA Section 203(h) states as follows:
Except as expressly provided by this Section there shall be no
modifications or limitations on the amount of income, gain, loss or
deduction taken into account in determining gross income, adjusted gross
income, or taxable income for federal income tax purposes for the taxable
year, or in the amount of such items entering into the computation of base
income and net income under this Act for such taxable year, whether in
respect of property values as of August 1, 1969 or otherwise.
IITA Section 202 then defines net income as that portion of the taxpayer’s “base
income” as defined in IITA Section 203, which is allocated or apportioned to Illinois
under the provisions of Article 3 of the IITA, less certain deductions. Base income that
constitutes nonbusiness income is allocated to Illinois under IITA Sections 301(c)(2) and

303. Base income that constitutes business income is apportioned to Illinois under IITA
     Section 304.
     Although the IITA does not define the term “insurance company,” IITA Section 102
     states “except as otherwise expressly provided or clearly appearing from the context,
     any term used in this Act shall have the same meaning as when used in a comparable
     context in the United States Internal Revenue Code.” 86 Ill. Adm. Code Section
     100.3420(b) provides the term “insurance company” for Illinois income tax purposes to
     mean any taxpayer properly treated as an insurance company for federal income tax
     purposes under Subchapter L of the IRC (Sections 801 through 848).

COMPANY/NAME
Page 3
March 21, 2023
In general, pursuant to IITA Section 304(b)(1), the business income of an insurance
company for a taxable year is to be apportioned to Illinois by multiplying the income by a
fraction, the numerator of which is the direct premiums written for insurance upon
property or risk in this State, and the denominator of which is the direct premiums
written for insurance upon property or risk everywhere. The term “direct premiums
written” as defined in IITA Section 304(b)(1) means “the total amount of direct premiums
written, assessments and annuity considerations as reported for the taxable year on the
annual statement filed by the company with the Illinois Director of Insurance.”
86 Ill. Adm. Code Section 100.3420(c)(1) further explains “direct premiums written” as
related to the apportionment factor:
The apportionment factor shall take into account only those receipts that
are included in either “gross premiums written” under IRC Section
832(b)(4)(A) or “gross amount of premiums” under IRC Section
803(a)(1)(A). Only receipts that are included in federal taxable income of
the taxpayer, and that are not subtracted in the computation of the IITA,
may be included in the apportionment factor. (See Continental Illinois
National Bank and Trust Company of Chicago v. Lenckos, 102 Ill. 2d 210
(1984).)
In addition, 86 Ill. Adm. Code Section 100.3420(c)(2) provides only direct premiums
written for insurance, assessments against mutual policyholders and consideration for
annuity contracts that include elements of insurance are to be included in the
apportionment factor. Other receipts are excluded from the apportionment factor, even
if included in net income. Some examples of receipts excluded from the apportionment
factor are listed in 86 Ill. Adm. Code 100.3420(c)(3): interest, dividends and other
income from investments; gains or losses from the adjustment of reserves, salvage or
subrogation; deposit-type funds; premiums on which State income taxes are prohibited
by federal law.
86 Ill. Adm. Code Section 100.3420(d) provides:
(d) Insurance on Property or Risk in this State. A direct premium is written for
insurance upon property or risk in this State and included in the numerator of the
apportionment factor if it is allocated to this State in the annual statement filed by
the insurance company with the Director of Insurance. If an insurance company
does not file an annual statement with the Director of Insurance or if any direct
premiums written by an insurance company are not allocated to a specific state
on its annual statement, that insurance company shall include in the numerator of
its apportionment factor the direct premiums written for insurance on property or
risk in this State, determined in accordance with the determination of gross
taxable premium written under Section 409(1) of the Illinois Insurance Code [215
ILCS 5/409(1)], provided that the determination shall be made without allowing

COMPANY/NAME
Page 4
March 21, 2023
the exceptions in that Section 409(1) for premiums on annuities, premiums on
which State premium taxes are prohibited by federal law, premiums paid by the
State for Medicaid eligible insureds, premiums paid for health care services
included as an element of tuition charges at any university or college owned and
operated by the State of Illinois, premiums on group insurance contracts under
the State Employees Group Insurance Act of 1971 [5 ILCS 375], or premiums for
deferred compensation plans for employees of the State, units of local
government or school districts.
Section 409(1) of the Illinois Insurance Code provides for the annual privilege tax
payable by insurance companies that write certain types of insurance. This state
privilege tax is equal to a percentage of the net taxable premium written, together with
any amounts due under Section 444 of the Illinois Insurance Code. The gross taxable
premium written is the gross amount of premiums received on direct business during
the calendar year on contracts covering risks in Illinois but exempts a statutory list of
premiums including those premiums on which State premium taxes are prohibited by
federal law.
42 U.S.C. § 1395w-24 (Section 1854(g) of Title XVIII of the Social Security Act)
“Prohibition of State Imposition of Premium Taxes” provides:
No State may impose a premium tax or similar tax with respect to
payments to Medicare+Choice [Medicare Advantage; “MA”] organizations
under section 1853 [42 U.S.C. § 1395w-23].
42 U.S.C. § 1395w-26(b)(3) (Section 1856(b)(3) of Title XVIII of the Social Security Act)
“Relation to State laws” provides:
The standards established under this part [42 U.S.C. § 1395w-21 et seq.]
shall supersede any State law or regulation (other than State licensing
laws or State laws relating to plan solvency) with respect to MA plans
which are offered by MA organizations under this part.
42 C.F.R. § 422.404 “State premium taxes prohibited” provides:
(a) Basic rule. No premium tax, fee, or other similar assessment may be
imposed by any State, the District of Columbia, the Commonwealth of
Puerto Rico, the Virgin Islands, Guam, and American Samoa, or any of
their political subdivisions or other governmental authorities with respect to
any payment CMS makes on behalf of MA enrollees under subpart G of
this part, or with respect to any payment made to MA plans by
beneficiaries, or payment to MA plans by a third party on a beneficiary’s
behalf.

COMPANY/NAME
Page 5
March 21, 2023
(b) Construction. Nothing in this section shall be construed to exempt any
MA organization from taxes, fees, or other monetary assessments related
to the net income or profit that accrues to, or is realized by, the
organization from business conducted under this part, if that tax, fee, or
payment is applicable to a broad range of business activity.
Therefore, as outlined above, the computation of Illinois privilege tax aligns with federal
law by exempting payments to Medicare+Choice [MA] organizations in the privilege tax
calculation. Illinois income tax, however, is a tax on net income. It is not a “premium
tax or similar tax” as applied to Medicare+Choice [MA] organizations because it is not
imposed on direct premiums and applies to a broad range of business activities of the
taxpayer [cf. Health Net Life Ins. Co. v. Dep’t of Revenue, 24 OTR 514, Or. T.C. May 3,
2021, holding Oregon’s minimum tax is not a tax “on” net income as it is a “premium tax
or similar tax”; Group Health Cooperative v. Department of Revenue, 8 Wash App 2d
210, 438 P3d 158 (2019) holding that Washington business and occupation tax was
“similar” to a premium tax]. An insurance company selling Medicare Title XVIII
premiums in Illinois is not exempt from Illinois income tax and may not subtract that
premium income when computing base income.
In general, income and expenses should be aligned. As the Medicare Title XVIII
premiums are included in base income, the related expenses should be allowed as a
deduction. However, no provision in IITA Section 203 requires the related expenses to
be added back to federal taxable income. Therefore, pursuant to IITA Section 203(h),
no modification to federal taxable income is allowable.
As stated above, this is a GIL. A GIL does not constitute a statement of Department
policy that applies, interprets or prescribes the tax laws, and it is not binding on the
Department.
Sincerely,

Jennifer Uhles
Associate Counsel (Income Tax)