Can an insurance carrier calculate its Utah workers' compensation premium tax on a deductible policy using the self-insured employer's formula instead of the pre-deductible full premium?

Plain-English summary

A coal mine operator's counsel wrote to the Commission on behalf of a client negotiating a deductible workers' compensation insurance policy. Under the proposed policy, the insurance carrier would pay all statutory benefits, but the employer would reimburse the carrier for the first portion of each claim (the deductible). The carrier had initially calculated its Utah workers' compensation premium tax on the full pre-deductible premium and paid roughly that amount — a number the client believed was too high compared to what a self-insured employer would owe using the formula in Utah Code § 34A-2-202 (which multiplies a standard loss-cost premium by an experience modification factor and a safety factor). The client asked the Commission to confirm that an insurer could instead use that lower self-insured formula for a deductible policy.

The Commission said no. Utah Code § 59-9-101(2)(b) defines the taxable "total workers' compensation premium income" as the net written premium calculated before any reduction for the insured employer's deductible — meaning the tax is based on what the premium would have been without the deductible discount, not on any alternative formula. The Commission found the statute's language too precise to read the word "calculated" as inviting a substitution of the self-insured formula, and it wasn't persuaded that the Legislature intended insurer taxation to mirror self-insured taxation. It pointed out that self-insured employers bear materially different burdens that insured employers don't: they carry more direct financial risk, need annual approval from the Utah Labor Commission to self-insure at all, and often must post substantial security deposits to guarantee claims payment under § 34A-2-201.5. Letting insurers use the self-insured formula could equalize the tax cost between self-insuring and buying a deductible policy — potentially discouraging employers from carrying insurance at all, which the Commission didn't read the statute to intend. It also noted that Utah insurance regulation (Department of Insurance Bulletin 92-7) only permits "reimbursable" deductible plans, where the insurer pays the claim first and then seeks reimbursement from the employer — reinforcing that the insurer, not the employer, remains the party bearing ultimate responsibility and thus the appropriate tax basis.

What this means for you

Insurance carriers writing Utah workers' compensation deductible policies

Calculate your premium tax on the policy's full pre-deductible premium — the amount you would have charged without the deductible discount — not on any formula tied to the self-insured employer's tax basis. The deductible reduces what the employer effectively pays out-of-pocket for claims, but it doesn't reduce your tax base.

Employers negotiating a deductible workers' compensation policy

Don't expect your insurer's tax cost (and by extension, likely your premium) to track what you'd pay if you self-insured instead. The Commission views insured and self-insured arrangements as facing genuinely different risks and regulatory burdens, and taxes them on different bases deliberately.

Accountants and tax professionals advising on workers' compensation costs

This ruling confirms the premium tax base is the undiscounted premium under § 59-9-101(2)(b), regardless of how favorable the § 34A-2-202 self-insured formula might look by comparison. Factor the full pre-deductible premium tax into cost comparisons between self-insuring and purchasing a deductible policy.

Common questions

Q: Can an insurer use the self-insured formula to calculate tax on a deductible policy?
A: No. The Commission held that § 59-9-101(2)(b) requires the tax to be based on the full premium before any deductible-related reduction, not the § 34A-2-202 self-insured formula.

Q: Why does the deductible not reduce the insurer's tax base?
A: Because the statute specifically defines taxable premium income as calculated before any reduction for the insured employer's deductible, retention, or reimbursement amounts.

Q: Are self-insured employers and insured employers taxed the same way?
A: No — they're taxed under separate statutory formulas, and the Commission found real differences in risk exposure, regulatory approval requirements, and security-deposit obligations that justify treating them differently.

Q: Can I rely on this ruling for my own deductible policy's tax treatment?
A: No — it binds the Commission only for the taxpayer and facts described. Confirm current premium tax rules with the Commission or a Utah insurance tax professional.

Citations and references

Statutes and authorities cited:

• Utah Code Ann. § 59-9-101(2)(a) (workers' compensation premium tax on admitted insurers)
• Utah Code Ann. § 59-9-101(2)(b) (taxable premium income calculated before deductible reduction)
• Utah Code Ann. § 34A-2-202 (self-insured employer's separate premium tax calculation formula)
• Utah Code Ann. § 34A-2-201.5 (security deposit requirement for self-insured employers)
• Utah Insurance Department Bulletin 92-7 (Revised 10/96) (reimbursable deductible workers' compensation plans)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/00-017.pdf

Original ruling text

00-017

Response June 27, 2000

REQUEST LETTER

April 26, 2000

Dear Commissioner Johnson:

Our firm represents COMPANY A, COMPANY B and COMPANY C, which has the principal ownership of COMPANY. COMPANY is the operator of three coalmines in central Utah. These coal mine operations employ approximately 538 employees within the state. COMPANY has two employees within the state.

Under Utah law, COMPANY A and COMPANY B are required to either carry workers' compensation insurance or provide self-insurance for workers' compensation claims. COMPANY C currently carries a deductible workers' compensation insurance policy. This policy includes COMPANY A and COMPANY B as the named insured employer for their respective Utah workers' compensation obligations.

Pursuant to Utah Code Ann. ' 59-9-101(2)(a), each March 1st, all admitted insurers are required to pay a tax to the Commission on the "workers' compensation premium income" they received during the preceding calendar year. This tax is currently equal to 10% of premium income received. See the attached copy of Utah Code Ann. ' 34A-2-202(1)(d). Self-insurers are also required to pay the 10% workers' compensation tax. Because self-insurers do not actually pay premiums to a third party, the premium tax is calculated by applying the 10% tax rate to a hypothetical premium calculated pursuant to the formula set forth in Utah Code Ann. ' 34A-2-202. Pursuant to Utah Code Ann. ' 34A-2-202, the calculated premium is equal to:

The Total Standard Premium (Premium determined by applying the National Council loss-cost factors for applicable class code times 110%)

x The Employer Experience Modification Factor (for Utah only)

x Safety Factor

= Calculated Premium Subject to Tax

x 10% Tax Rate

= Workers' Compensation Tax

The workers' compensation insurance policy currently issued to COMPANY C is a deductible policy. Pursuant to this policy, Arch pays its insurance carrier (the "Carrier") an annual premium of approximately $$$$$ (exclusive of premium tax). In exchange, Arch receives a policy that pays full statutory benefits in coverage, but Arch is required to pay the first $$$$$ in claims (including allocated expenses) for each occurrence as its deductible.

Based on this deductible policy, the Carrier initially believed that it was required to pay a premium tax equal to 10% of the $$$$$ premium and 10% of the payments made by COMPANY C for the portion of claims falling within the deductible amount of the coverage. Earlier this year, the Carrier received communications from the Utah State Tax Commission (the "Commission") that the Carrier's tax calculation was not correct and that the tax should be computed on the full premium before adjustment for the deductible. Based on this communication, the Carrier estimated a full premium of $$$$$ and on March 31, 2000 paid the Commission $$$$$ as the workers' compensation premium tax.

COMPANY C believes that the Carrier's estimated fill premium of $$$$$ is in error and thus the tax of $$$$$ is erroneous. The premium estimated by the Carrier is substantially in excess of what the premium would have been for a self-insurer using the formula prescribed by Utah Code Ann. ' 34A-2-202. In Section 34A-2-202, the standard premium subject to tax is the National Council's loss-cost rate plus 10% multiplied by an employer experience factor and a safety factor. The Carrier did not use a safety factor in the computation of this "full premium." By using its own "full premium" estimate as the taxable premium, the Carrier paid a tax of $$$$$ more than would have been due from COMPANY C if it had insured the same risk as a self-insurer. As is shown on Exhibit A, the tax imposed on COMPANY C as a self-insurer would have been $$$$$.

The purpose of this letter is to request direction from the Commission as to how the premiums the Carrier receives for providing CFC and ACS workers' compensation coverage should be taxed. We believe that a correct reading of the law is that insurance carriers are to be taxed on the same basis as self-insured employers. The workers' compensation premium on which the tax is imposed is defined at Utah Code Ann. ' 59-9-101(2)(b) as the Anet written premium as calculated before any premium reduction....@ (emphasis added). The law provides for the calculation of the taxable premium and its seems to us that the premiums on which an insurance carrier pays the tax should be calculated using the guidance provided by Utah Code Ann. ' 34A-2-202. This is the only guidance provided by the law and we think it is reasonable to assume that the drafters of the law intended that the tax on insurance carriers be comparable to that on self-insurers. It certainly isn't reasonable to suggest that the legislature intended to favor self-insured employers. Unless insurance companies are taxed on the same basis as self-insured employers, most employers will be forced to self-insure their workers' compensation coverage, which we believe is not the intent of the state's statutes and regulations nor in the best interests of workers in this state.

Please issue an advisory letter stipulating that the tax on the deductible workers' compensation policy of Arch should be calculated and paid using the formula provided at Utah Code Ann. ' 34A-2-202. Representatives from COMPANY C and I would welcome the opportunity to meet with you to discuss any questions or concerns you may have. Please feel free to call me at the above number.

Sincerely,

NAME

RESPONSE LETTER

June 27, 2000

NAME

ADDRESS

RE: Advisory Opinion Concerning Workers= Compensation Premium Assessment

Dear NAME,

You have asked for an advisory opinion concerning the workers= compensation premium assessment that is paid by insurers pursuant to Utah Code Ann. '59-9-101(2). You specifically ask whether an insurer=s liability arising under Section 59-9-101(2) may, in the alternative, be calculated using the formula provided in Utah Code Ann. '34A-2-202. Section 34A-2-202 assesses a separate tax on Aself-insured@ employers who do not pay a premium to third parties. Because your client is in negotiations to purchase a workers= compensation policy that is subject to a deductible, you state that the total costs to your client to purchase that policy will depend upon whether the insurer may calculate its premium tax using the alternative approach. You provide evidence that an insurer=s premium tax liability would be lower if that insurer may calculate its premium tax using the self-insured employer=s formula set forth in Section 34A-2-202.

Utah Code Ann. '59-9-101(2)(a) provides that A[e]very admitted insurer writing workers' compensation insurance in this state . . . shall pay to the tax commission . . . a premium assessment . . . [on] the total workers' compensation premium income received by the insurer from workers' compensation insurance in this state . . . .@ Subsection (2)(b) defines Atotal workers' compensation premium income@ as Athe net written premium as calculated before any premium reduction for any insured employer's deductible, retention, or reimbursement amounts and also those amounts equivalent to premiums as provided in Section 34A‑2‑202.@

The Utah State Department of Insurance administers workers= compensation deductible plans and has issued its Bulletin 92-7 (Revised 10/96) to address how these plans should be administered. Bulletin 92-7 clarifies that Utah law only permits insurers to issue workers= compensation deductible plans that are Areimbursable@ plans. Accordingly, even though your client may be required to pay the initial portion of any claim as a deductible, the insurance company must pay all losses, then seek reimbursement from your client for the deductible amount. The Department of Insurance will only approve workers= compensation deductible policies that contain such a provision. In addition, the insurance company would not be relieved of any claim payments due or accrued if your client were to become insolvent or bankrupt and could not pay the deductible reimbursement amount it owed the insurer.

The amount of tax due on a workers= compensation policy under Section 59-9-101(2) is based on the Anet written premium as calculated before any premium reduction for any insured employer=s deductible . . . .@ To determine this tax basis, an insurance company, in accordance with Bulletin 92-7, currently reports to the Department of Insurance the policy premium it would have charged its customer had the premium not been reduced to account for the deductible. You provide evidence that suggests that such a tax basis is greater than the tax basis that could be derived using the self-insured employer=s tax basis formula in Section 34A-2-202. Accordingly, you ask the Tax Commission to allow the insurer to instead calculate its tax basis using the Section 34A-2-202 formula.

Section 59-9-101(2)(b) clearly provides that an insurer=s tax basis on workers= compensation deductible policies is calculated by determining what the policy premium would have been had it been issued without a deductible amount. The Tax Commission is not persuaded that the existence of the word Acalculated@ in this statutory definition allows the insurer to calculate its tax basis using the self-insured employer=s tax basis formula in Section 34A-2-202. The language is too precise to allow for this interpretation.

Nor are we persuaded, without language suggesting otherwise, that the Legislature intended the tax on insurers to be comparable to the tax levied on self-insured employers; i.e., allowing an insurer to calculate its tax basis using the self-insured employer=s formula in Section 34A-2-202. It is evident that a self-insured employer is exposed to a higher level of risk than an employer who purchases insurance. In addition, there are other costs and administrative burdens a self-insured employer must face that an employer who buys a policy from an insurer need not. For example, an employer may not self-insure under Utah law unless it receives yearly approval from the Utah State Labor Commission to do so. Also, the Labor Commission often requires an employer to deposit substantial sums of security to insure that claims will be paid in the event of an employer=s reluctance or inability to pay them. Utah Code Ann. '34A-2-201.5.

Because of these additional costs and administrative burdens, an employer=s total costs to self-insure may or may not be less than the premium tax costs associated with purchasing a policy. Allowing an insurer to calculate its tax basis using the Section 34A-2-202 formula might result in a self-insured employer and an employer purchasing a policy paying the same amount of premium tax, but such a policy could also encourage employers not to self-insure because its overall costs to do so could be greater.

For these reasons, the Tax Commission supports the current policy that an admitted insurer selling workers= compensation insurance in Utah must calculate its workers= compensation premium tax on the policy premium it would have charged its customer had the premium not been reduced to account for the deductible. Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner