Income Taxes
The components of deferred income taxes at December 31 are as follows:
|
| | | | | | | |
| 2013 | | 2012 |
Deferred tax assets relating to: | | | |
Retirement benefits | $ | 287.8 |
| | $ | 405.3 |
|
Accrued expenses | 342.8 |
| | 431.2 |
|
Insurance reserves | 213.1 |
| | 221.2 |
|
Net operating loss carryforwards | 17.2 |
| | 19.2 |
|
Bad debt reserves | 124.8 |
| | 108.2 |
|
State income tax | 32.9 |
| | 79.3 |
|
Deferred compensation | 52.0 |
| | 55.7 |
|
Investment basis difference | 166.3 |
| | 138.2 |
|
Other | 84.0 |
| | 47.0 |
|
Total deferred tax assets | 1,320.9 |
| | 1,505.3 |
|
Valuation allowance | (24.1 | ) | | (18.1 | ) |
Total deferred tax assets, net of valuation allowance | 1,296.8 |
| | 1,487.2 |
|
Deferred tax liabilities relating to: | | | |
Unrealized gains on securities | 266.5 |
| | 431.0 |
|
Acquisition related: | | | |
Trademarks and other non-amortizable intangible assets | 2,200.5 |
| | 2,200.5 |
|
Subscriber base, provider and hospital networks | 370.9 |
| | 447.7 |
|
Internally developed software and other amortization differences | 703.9 |
| | 599.3 |
|
Retirement benefits | 231.5 |
| | 214.1 |
|
Debt discount | 186.9 |
| | 189.7 |
|
State deferred tax | 55.3 |
| | 165.9 |
|
Depreciation and amortization | 33.1 |
| | 73.9 |
|
Other | 190.4 |
| | 151.6 |
|
Total deferred tax liabilities | 4,239.0 |
| | 4,473.7 |
|
Net deferred tax liability | $ | (2,942.2 | ) | | $ | (2,986.5 | ) |
Deferred tax asset-current | $ | 383.0 |
| | $ | 236.4 |
|
Deferred tax liability-noncurrent | (3,325.2 | ) | | (3,222.9 | ) |
Net deferred tax liability | $ | (2,942.2 | ) | | $ | (2,986.5 | ) |
Changes in the valuation allowance during 2013 included an increase of $12.1 impacting tax expense related to additional state operating losses and a reduction of $6.1 impacting goodwill related to acquisition goodwill adjustments for a net increase of $6.0.
Changes in the valuation allowance during 2012 included an $11.0 release related to federal credits and loss carryforwards as tax settlements were completed and establishment of an $18.1 allowance related to state net operating losses net of the federal benefit.
Significant components of the provision for income taxes for the years ended December 31 consist of the following:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Current tax expense (benefit): | | | | | |
Federal | $ | 1,226.4 |
| | $ | 1,060.2 |
| | $ | 1,150.4 |
|
State and local | (42.6 | ) | | 95.7 |
| | 21.6 |
|
Total current tax expense | 1,183.8 |
| | 1,155.9 |
| | 1,172.0 |
|
Deferred tax expense | 22.1 |
| | 51.4 |
| | 139.2 |
|
Total income tax expense | $ | 1,205.9 |
| | $ | 1,207.3 |
| | $ | 1,311.2 |
|
State and local current tax expense is reported gross of federal benefit, and includes amounts related to true up of prior years’ tax, audit settlements, uncertain tax positions and state tax credits. Such items are included in multiple lines in the following rate reconciliation table on a net of federal tax basis.
A reconciliation of income tax expense recorded in the consolidated statements of income and amounts computed at the statutory federal income tax rate for the years ended December 31, is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Amount at statutory rate | $ | 1,344.1 |
| | 35.0 | % | | $ | 1,350.4 |
| | 35.0 | % | | $ | 1,385.3 |
| | 35.0 | % |
State and local income taxes net of federal tax benefit | 24.4 |
| | 0.6 |
| | 25.5 |
| | 0.6 |
| | 42.3 |
| | 1.1 |
|
Tax exempt interest and dividends received deduction | (64.9 | ) | | (1.7 | ) | | (59.3 | ) | | (1.5 | ) | | (58.6 | ) | | (1.5 | ) |
Audit settlements | — |
| | — |
| | (200.5 | ) | | (5.2 | ) | | (49.7 | ) | | (1.3 | ) |
Other, net | (97.7 | ) | | (2.5 | ) | | 91.2 |
| | 2.4 |
| | (8.1 | ) | | (0.2 | ) |
Total income tax expense | $ | 1,205.9 |
| | 31.4 | % | | $ | 1,207.3 |
| | 31.3 | % | | $ | 1,311.2 |
| | 33.1 | % |
During the year ended December 31, 2013 we recognized income tax benefits of $65.0, or $0.21 per diluted share, resulting from a favorable tax election made subsequent to the Amerigroup acquisition. This benefit is included in Other, net above.
During the year ended December 31, 2012, we recognized income tax benefits of $200.5, or $0.62 per diluted share, for settlement of certain of our open tax issues with the Internal Revenue Service, or IRS, following approval by the Joint Committee on Taxation. This included amounts related to not-for-profit conversion and corporate reorganizations in prior years, as well as amounts associated with issues related to certain of our acquired companies. This income tax benefit includes the release of gross unrecognized tax benefits from uncertain tax positions, discussed below, release of a valuation allowance, discussed above, and recognition of interest income. This income tax benefit, and resulting decrease in the effective tax rate, was partially offset due to the non-tax deductibility of litigation settlement expenses associated with the settlement of a class action lawsuit in June 2012 and an increase in our state deferred tax asset valuation allowance attributable to the uncertainty associated with some of our state net operating loss carryforwards.
During the year ended December 31, 2011, following approval by the Joint Committee on Taxation, we settled the audit of our 2003 and 2004 (short year) federal tax returns, which had been in the appeals process with the IRS. This resulted in a tax benefit of $39.3. In addition, during the year ended December 31, 2011, we completed a state tax examination, resulting in additional tax benefits for audit settlements of $10.4.
The change in the carrying amount of gross unrecognized tax benefits from uncertain tax positions for the years ended December 31, is as follows:
|
| | | | | | | |
| 2013 | | 2012 |
Balance at January 1 | $ | 143.5 |
| | $ | 229.1 |
|
Additions for tax positions related to: | | | |
Current year | 5.0 |
| | 50.1 |
|
Prior years | — |
| | 13.0 |
|
Reductions related to: | | | |
Tax positions of prior years | (45.3 | ) | | — |
|
Settlements with taxing authorities | — |
| | (148.7 | ) |
Balance at December 31 | $ | 103.2 |
| | $ | 143.5 |
|
The table above excludes interest, net of related tax benefits, which is treated as income tax expense (benefit) under our accounting policy. The interest is included in the amounts described in the following paragraph.
As of December 31, 2013, $61.7 of unrecognized tax benefits would impact our effective tax rate in future periods, if recognized. Also included in the table above is $10.9 that would be recognized as an adjustment to additional paid-in capital and $5.7 that would be recognized as an adjustment to goodwill, neither of which would affect our effective tax rate. The December 31, 2013 balance also includes $0.8 of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Excluding the impact of interest and penalties, the disallowance of the shorter deductibility period would not affect our effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period.
For the years ended December 31, 2013, 2012 and 2011, we recognized approximately $2.6, $(9.0) and $(0.1) in interest, respectively. We had accrued approximately $18.3 and $15.7 for the payment of interest at December 31, 2013 and 2012, respectively.
As of December 31, 2013, as further described below, certain tax years remain open to examination by the IRS and various state and local authorities. In addition, we continue to discuss certain industry issues with the IRS. As a result of these examinations and discussions, we have recorded amounts for uncertain tax positions. It is anticipated that the amount of unrecognized tax benefits will change in the next twelve months due to possible settlements of audits and changes in temporary items. However, the ultimate resolution of these items is dependent on the completion of negotiations with various taxing authorities. While it is difficult to determine when other tax settlements will actually occur, it is reasonably possible that one could occur in the next twelve months and our unrecognized tax benefits could change within a range of approximately $8.3 to $(84.8).
We are a member of the IRS Compliance Assurance Process, or CAP. The objective of CAP is to reduce taxpayer burden and uncertainty while assuring the IRS of the accuracy of tax returns prior to filing, thereby reducing or eliminating the need for post-filing examinations.
As of December 31, 2013, the examinations of our 2013 through 2010 tax years continue to be in process. The issues in 2010 have been resolved, but still require final approval from the Joint Committee on Taxation before they can be finalized. The 2011 tax year is at IRS Appeals, but at this time no hearing date has been established. The other years are being discussed with the IRS.
In certain states, we pay premium taxes in lieu of state income taxes. Premium taxes are reported with general and administrative expense.
At December 31, 2013, we had unused federal tax net operating loss carryforwards of approximately $44.8 to offset future taxable income. The loss carryforwards expire in the years 2017 through 2024. During 2013, 2012 and 2011 federal income taxes paid totaled $1,172.0, $1,188.2 and $1,153.9, respectively.
