Issue: Are worker's compensation deductible reimbursements considered premiums for purposes of the premium excise imposed by G.L. c. 63, §§ 22, 23?

Directive: No. Worker's compensation deductible reimbursements are not considered premiums for purposes of the premium excise imposed by G.L. c. 63, §§ 22, 23.

Discussion of Law:

Massachusetts General Laws chapter 63, §§ 22, 23 imposes an excise on gross premiums for all policies written or renewed for insurance of property or interests in Massachusetts by both domestic and foreign insurance companies. However, neither section defines the term "premiums." In cases where a term is undefined, the general rule of statutory construction is that the word is interpreted in accordance with its usual and natural meaning. Commissioner of Revenue v. AMIWoobroke, Inc., 418 Mass. 92, 95 (1994). A premium is defined as "the periodic payment required to keep an insurance policy in effect." See Black's Law Dictionary (8 th edition, 2004). See also The American Heritage Dictionary of the English Language (4 th edition, 2000) (premium: the amount paid or payable, often in installments, for an insurance policy.)

Under a worker's compensation policy, an insured employer is typically responsible for any payment amount for an employee that falls within the policy deductible, if any. The effect of the deductible is to reduce the premium the employer is required to pay to the insurer for insurance coverage of losses above the deductible. The employer alone bears the economic risk of loss at or below the dollar amount of the deductible. Generally, when there is a compensable claim to be paid to the employee, the insurance company advances amounts owed by the employer below the deductible to the insured worker but the employer then reimburses the insurer for these advances. See G.L. c. 152, § 25A(4)(b). In some cases, the employer provides funds to the insurance company to be held in a separate fund to be used to satisfy the employer's future liability for deductible payments. In either case, these amounts are sometimes referred to as "deductible reimbursements."

A deductible reimbursement is not a payment to keep an insurance policy in effect. It is considered a payment made by an employer to compensate for an insurance claim. The cost of the claim may be initially covered by the insurance company but the employer is then responsible for repayment of the deductible portion to the insurance company. Therefore, a deductible reimbursement is not a premium and as such is not included in the calculation of gross premiums for purposes of the excise under G.L. c. 63, §§ 22, 23.

The Commissioner of Revenue will apply this Directive going forward and to all open taxable years within the statute of limitations for assessment or abatement. Current procedures for filing amended returns/applications for abatement are available on the Department of Revenue's website, www.mass.gov/dor. Taxpayers may also consult Administrative Procedures 605 and 627. The statute of limitations at G.L. c. 62C, § 37 applies to such applications for abatement.

REFERENCE : G.L. c. 62C, § 37; M.G.L. c. 63, §§ 22, 23

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:MTF:rmh

November 6, 2006

DD 06-5