How are insurers and HMOs taxed on the coverages they issue for the Children's Health Insurance Program (CHIP), and what stays taxable?

Plain-English summary

This is an internal Comptroller memo summarizing how insurers and HMOs are taxed on the coverages they issue for the Children's Health Insurance Program (CHIP). It is mostly an insurance-tax summary, with one franchise-tax point.

• Premium taxes: exempt. CHIP insurance and HMO coverages are exempt from general revenue premium taxes - under Texas Insurance Code Art. 27.05 (children's health benefit plans) and, specifically for CHIP, Health and Safety Code Sec. 109.063.
• Franchise tax: the corporation is exempt. The Texas Healthy Kids Corporation is exempt from franchise taxes under Health and Safety Code Sec. 109.031(c).
• What stays taxable. There are no other statutory exemptions, so insurers and HMOs issuing CHIP coverage remain subject to:
  • Maintenance taxes under Insurance Code Art. 4.17 and 20A.33 (fees supporting the Texas Department of Insurance, with rates set annually by TDI); and
  • the Office of Public Insurance Counsel (OPIC) assessment under Art. 1.35B - 5.7 cents per policy or certificate of coverage, generally due the first year coverage is issued, with renewals assessed only on new coverage.

Currency note: This 2001 internal memo predates many changes to the CHIP program, the cited statutes, the tax rates, and the franchise tax itself (replaced by the margin tax effective January 1, 2008). Confirm current law.

What this means for you

Insurers and HMOs participating in CHIP

Your CHIP premiums were not hit by the general premium tax, and the state's Healthy Kids Corporation was franchise-exempt - but participation did not wipe out your other obligations. Maintenance taxes and the OPIC assessment still applied, and insurers typically passed those costs through in premiums.

Tax professionals

Read this as an insurance-tax map rather than a franchise ruling: premium-tax exemption (Art. 27.05; H&S Code 109.063), a single franchise exemption (H&S Code 109.031(c) for the Healthy Kids Corporation), and continuing maintenance-tax and OPIC-assessment liability. Every figure and citation is from 2001 - verify the current CHIP tax treatment before relying on it.

Common questions

Q: Are CHIP insurance and HMO coverages subject to premium tax?
A: No - they are exempt from general revenue premium taxes under Art. 27.05 and Health and Safety Code Sec. 109.063.

Q: Is the Texas Healthy Kids Corporation franchise-tax exempt?
A: Yes, under Health and Safety Code Sec. 109.031(c).

Q: What do insurers and HMOs still owe on CHIP coverage?
A: Maintenance taxes (Insurance Code Art. 4.17 and 20A.33) and the OPIC assessment (Art. 1.35B).

Citations and references

Statutes:

• Texas Insurance Code Art. 27.05 - children's health benefit plan coverages exempt from general revenue premium taxes
• Texas Health and Safety Code Sec. 109.063 - CHIP-specific premium-tax exemption
• Texas Health and Safety Code Sec. 109.031(c) - Texas Healthy Kids Corporation exempt from franchise taxes
• Texas Insurance Code Art. 4.17 and Art. 20A.33 - maintenance taxes still due from insurers and HMOs
• Texas Insurance Code Art. 1.35B - Office of Public Insurance Counsel assessment

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200108435L

Original ruling text

August 28, 2001

From: Gary Johnson

To: "Brown, David"

Subject: CHIPs Program-Taxation of Insurers and HMOs

David, per our conversation, following is a summary of the taxability of
coverages for the Children's Health Insurance Program (CHIPs):

1) Insurance and HMO coverages are exempt from general revenue premium taxes.
This means that insurers and HMOs that issue coverages to the CHIPs program
will not be subject to taxation on the premiums/revenues received for such
coverages.

The first exemption is provided under Art. 27.05, Texas Insurance Code
(referencing health benefit plans for children). The second exemption is
specific to the CHIPs program and is found in the Health and Safety Code,
Section 109.063.

2) The Texas Healthy Kids Corporation is exempt from Franchise taxes as
provided under the Health and Safety Code, Section 109.031(c).

3) Insurance and HMO coverages for the CHIPs program DO NOT have any other
statutory exemptions, therefore insurers and HMOs issuing coverages for CHIPs
continue to be subject to the following:

-- Maintenance taxes due under Art. 4.17 and 20A.33, Insurance Code. These
taxes are technically fees used to support the regulatory operation of the
Texas Dept. of Insurance (TDI). The tax rates are set annually by the TDI.

-- The Office of Public Insurance Counsel (OPIC) assessment under Art. 1.35B,
Texas Insurance Code. OPIC receives all funding from this assessment. The
assessment is "5.7 cents for each individual policy, and for each certificate
of insurance evidencing coverage under a group policy of life, health, or
accident insurance written for delivery and placed in force with the initial
premium thereon paid in full in this state during each calendar year if the
insurer is authorized to do business in this state . . ."

What this means is that the OPIC assessment is due from each insurer or HMO the
first year coverage is issued and premiums are received for such coverage
and/or certificate of insurance. If a group policy is issued, it will be
assessed that year. When the policy is renewed in second year, only
certificates of coverage for "new coverage" are subject to the OPIC assessment.
As an example, if a contract issued in 2001 is not renewed in 2002 with the
insurer, but instead is moved to another insurer or HMO, then it is treated as
new coverage during 2002 and subject to the OPIC assessment.

Since insurers and HMOs pay the taxes and assessments directly to the state,
they in turn pass these costs to the policyholders in the form of higher
premiums.

David, I hope this clarifies the taxation of insurance companies and HMOs for
the CHIPs program. Let me know if you need anything further.

Gary Johnson/463-4068