HomeMy WebLinkAbout1988-07-19; City Council; 9541; NWNL contract & minimum premium taxesAB# 954/
MTG. 7-19-88
DEPT. PER
City Council adopt Resolution No. ff-d .t'f approving the transfer of $27,274 from the general fund contingency account to pay for unpaid minimum premium taxes for the tax years 1986 and 1987.
TITLE: APPROVAL OF TRANSFER OF FUNDS
TO PAY MINIMUM PREMIUM TAXES UNDER THE CONTRACT WITH NWNL
ITEM EXPLANATION
On March 7, 1988, the U. S. Supreme Court declined to review the
Ninth Circuit Court of Appeals decision holding that the -gross
premiums subject to the California premium tax (2.35%) must include
the employer-paid portion of health claims. Such decision is now final. The City's plan with Northwestern National Life Insurance Company for the tax years 1986 and 1987 was a minimum premium plan subject to this decision and paragraph 10 of our contract with NWNL requires payment of additional premium taxes if imposed by a
determination of the Insurance Commissioner. In 1988, the insurance commissioner audited the returns for NWNL for the tax years 1986 and 1987 and determined that it owed additional premiums tax. Our insurance consultants, TPF & C, determined by letter dated June 22, 1988 that Carlsbad's share of this additional
liability is $10,917 for the tax year 1986 and $16,357 for the tax year 1987 for a total of $27,274.
FISCAL IMPACT
Carlsbad's share of this additional liability is $10,917 for the tax year 1986 and $16,357 for the tax year 1987 for a total of
$27 , 274.
EXHIBITS
Resolution No. ma944
Copy of letter dated June 22, 1988 from insurance consultant Copy of letter dated April 18, 1988 from NWNL
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RESOLUTION NO. 88-248
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CARLSBAD, CALIFORNIA, TRANSFERRING FUNDS FROM THE CONTINGENCY FUND TO THE TAX ACCOUNT IN THE PERSONNEL DEPARTMENT.
WHEREAS, the City must pay the 1986 and 1987 assessment
in taxes from our minimum premium health plan with Northwestern
National Life; and
WHEREAS, there is sufficient money in the other funds to pay
for the taxes.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the
City of Carlsbad, California, as follows:
1. That the above recitations are true and correct.
2. That $27,274 will be transferred from the Contingency
Fund to (001-820-1510-2930) Taxes to pay for the tax assessment
from our minimum premium health plan.
PASSED, APPROVED AND ADOPTED at a regular meeting of the
Carlsbad City Council held on the 19th day of July, 1988,
by the following vote, to wit:
AYES: Council Members Lewis, Kulchin, Pettine, Mamaux and Larson
NOES: None
ABSENT: None
ATTEST:
(SEAL)
1925 Century Park East
suite 1500
Los Angeles, CA 90067-2790
Facsimile: 213 551-5757
213 551-5600
CI Towers Perrin company
June 22, 1988
Ms. Marsha Payne Senior Management Analyst City of Carlsbad
1200 Elm Avenue Carlsbad, California 92008-1989
Re: Minimum Premium Tax
Dear Marsha:
The following are our responses to the questions presented to you by Ronald R. Ball, Carlsbad's Assistant City
Attorney.
1. Premium taxes were not collected in 1986 and 1987 because you were under Northwestern National Life's
minimum premium contract for those two years. According to the terms of this contract, Carlsbad pays the California state insurance tax (2.35%) on only the
premium billed up-front monthly (minimum premium). The
paid claims were not taxed under a minimum premium plan because these were determined to be self-insured by the employer. This was the basis for the court case. The California Department of Insurance felt they had the right to tax these paid claims.
Before 1986 Carlsbad was under a conventional, fully
insured arrangement which applied the premium tax (2.35%) to your paid claims.
The citation is the Supreme Court of California Case MetroDolitan Life Insurance Companv v. State Board of
Eaualization (1982), 32 Ca1.3d649. See enclosed information.
2.
TPFd _.-
Ms. Marsha Payne June 22, 1988 Page 2.
3. The amounts were calculated by multiplying your paid claims in 1986 (plus interest) and 1987 (no interest) by
the premium tax of 2.35%:
1986 Paid Claims $418,530
$ 9,835
$ 10,917
x 2.35%
+ 11%. interest (effective)
1987 Paid Claims $696,034
$ 16,357
X 2.35%
4. Minimum premium plans were first introduced in 1966 and the original court case, Metropolitan v. State Board of
Equalization, contested the applicability of state insurance premium taxes for pre-ERISA years 1967 through 1969. ERISA preemption has since been tested all the way
to the Supreme Court to no avail.
The 1979 limitation applies to the statute of limitations that apply to this issue.
5. The City of Carlsbad pays only a monthly minimum premium (about 15% of your overall liability) up-front; the City is then billed when claims are paid up to a maximum
contracted amount equal to your full premium rates times the number of employees in each category.
Please give us a call if you require any further information.
Sincerely, 9- Jages K. Foreman Consultant
JKF : sd
Enclosure
Direct Dial: 213-551-5605
cc: Jerome N. Pieti - City of Carlsbad Grant Yates - City of Carlsbad Charles Bachman - TPF&C
20 WASHINGTON AVENUFSOUTH MINNEAPOLIS, MINNESOTA 55401
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
MARK GERLACH
SECOND VICE PRESIDENT, GROUP ADMINISTRATION (612) 372-1 148
April 18, 1988
Group Number 19235-0
Marsha Payne CITY OF CARLSBAD
1200 Elm Avenue Carlsbad, California 92008-1989
Dear Contractholder:
As you may be aware, the United States Supreme Court has declined to review the California Premium Tax on minimum premium plans. leaves standing a United States Court of Appeals ruling that affirms California's right to tax minimum premium plans. The tax, effective January 1, 1979, applies to claims, premiums and reserves for groups
covering California residents, regardless of case situs. We had previously collected taxes for 1979 through 1985.
Now that the United States Court of Appeals ruling has been affirmed, Northwestern National Life Insurance Company (NWNL) needs to collect the unpaid premium taxes assessed for 1986 plus interest and 1987 by the State of California. In accordance with the terms of our Split Risk and Minimum Premium contracts, the Plan Sponsor is liable for any such
assessments. The amount due NWNL is as follows:
This
1986 assessment plus interest $10,917
1987 assessment $16,357
TOTAL AMOUNT DUE $27,274
The total amount must be paid within 31 days. Please make the check payable to Northwestern National Life Insurance Company and use the
enclosed return envelope. please enclose a copy of this letter with your remittance.
'
To assure proper crediting of your payment,
Thank you for your prompt attention to this matter. questions, please contact the NWNL Newport Beach Regional Office.
Sincerely,
If you have any
Mark Gerlach Second Vice President
Enclosure
cc: Jim Foreman
Charlie Rachman