Written by Jennifer Webb, Big “I” federal government affairs counsel, originally published by IA Magazine
Yesterday, the Internal Revenue Service issued a draft regulation on a key provision of the 2017 tax law (26 U.S.C. §199A) that allows for a 20 percent deduction on “qualified business income” for owners and shareholders of pass-through businesses.
Under the draft regulation, owners and shareholders of insurance agencies and brokerages can take the 20 percent tax deduction on qualified business income, no matter their taxable income levels, because the IRS does not consider insurance agents and brokers to be a “specified service trade or business.”
Owners and shareholders of specified service trades and businesses cannot take advantage of the deduction if their taxable income is over a certain level.
What does that mean?
The relevant part of the draft regulation reads as follows:
“Proposed §1.199A-5(b)(2)(x) uses the ordinary meaning of “brokerage services” and provides that the field of brokerage services includes services in which a person arranges transactions between a buyer and a seller with respect to securities (as defined in section 475(c)(2)) for a commission or fee. This includes services provided by stock brokers and other similar professionals, but does not include services provided by real estate agents and brokers, or insurance agents and brokers.”
Section 199A provides the 20 percent tax deduction to an owner or shareholder of a pass-through entity where the owner or shareholder’s annual taxable income does not exceed $315,000 for joint filers and $157,500 for single filers in 2018.
In other words, all owners or shareholders that are organized as pass-throughs under the above income thresholds can utilize the full 20 percent deduction, and any regulations or guidance released by the Treasury Department, including the draft released yesterday, will not impact this.
However, an owner or shareholder of a specified service trade or business with an annual taxable income between $315,000 and $415,000 (joint) and $157,500 and $207,500 (single) will see the deduction phased out.
Those with an annual taxable income above $415,000 (joint) and $207,500 (single) will be prohibited from utilizing the new deduction.
Why was this an issue for insurance agents?
While the regulation is only in draft form, it was previously unclear whether insurance agencies and brokerages would be considered specified service trades or businesses.
Because insurance agencies and brokerages are not a specified service trade or business, it means that those with annual taxable income above the $315,000 (joint) and $157,500 (single) thresholds can take advantage of the deduction.
But, the total amount of the deduction for those at these upper income levels cannot exceed 50 percent of employee W-2 wages, or 25 percent of W-2 wages plus 2.5 percent of capital assets (e.g. tangible property purchased for the business), whichever is greater. Alongside the draft rule the IRS released a proposed procedure for calculating W-2 wages.
The Big “I” has been aggressively advocating before Congress and the Treasury Department that insurance agencies and brokerages should not be considered a specified service trade or business.
In April, the Big “I” sent a letter to key Treasury Department officials and had a meeting with the department. As a follow-up to the meeting, the Big “I” sent another letter to the Treasury Department, specifically addressing questions about the term “brokerage.” The Big “I” has also had a number of meetings with key congressional offices on this issue.
Beyond the “specified service trade or business” definition, the draft regulation covers several issues related to the Section 199A deduction which may impact agents and brokers depending on individual circumstances.
For example, financial advice and retirement planning services would qualify as specified service trades or businesses, and consulting is considered a specified service trade or business to the extent that a fee is charged for such services. However, “consulting that is embedded in, or ancillary to, the sale of goods, if there is no separate payment for consulting services” is not considered a specified service trade or business.
Also of note, a trade or business is not a specified service trade or business if it has “gross receipts of $25 million or less (in a taxable year) and less than 10 percent of the gross receipts. . .[are] attributable to the performance of an SSTB.”
If gross receipts are above $25 million, the relevant percentage is 5 percent. This means an insurance agency that has predominantly a property-casualty book of business, but also has a small retirement planning, consulting or financials services component, would not be considered a specified service trade or business under the draft regulation.
Where things stand right now
The Big “I” is currently reviewing the draft regulation, which is open for a 45-day public comment period. A public hearing on the regulation is tentatively scheduled for Oct. 16. Because the regulation is in draft form and open for public comment, changes may occur before the rule becomes final.
The Big “I” will provide comments to the IRS and additional guidance to members over the next few months. Final regulations are expected before the end of the year.
OIA will keep members informed as we learn more.
The Ohio Bureau of Workers’ Compensation (BWC) launched its Other States Coverage Program in March 2016, and many agents breathed a sigh of relief.
This made me incredibly happy too, as this was a big problem for many Ohio employers, resulting in lots of headaches for agents.
While BWC generally provides coverage for employees working temporarily outside of Ohio, problems can arise when injured employees file their claims in a state that does not recognize BWC’s coverage.
This leads to complications, including delayed treatment for the injured employees and penalties for their employers from the state in which the claim was filed.
To make matters even more confusing, some states require Ohio employers to obtain workers' compensation coverage in their state (in addition to BWC's coverage) for any work performed by their employees in that state, regardless of how brief they’re there.
Ohio’s border states such as Michigan, Pennsylvania and Kentucky do not recognize Ohio BWC coverage.
West Virginia recognizes BWC coverage "for a period not exceeding 30 calendar days in any 365-day period."
Indiana will respect Ohio’s jurisdiction, and does not limit it to a certain amount of days. However, this provision is for employees who are Ohio residents and only temporarily in Indiana.
What a confusing mess.
But guess what?
You can be part of the solution for your commercial clients who face financial exposures while working outside Ohio.
While Ohio employers can access BWC’s Other States Coverage program on their own through BWC, many already are (or will likely) turn to agents for expert advice and help in managing out-of-state-work risks.
When this happens, you can find the best solution for your clients’ needs – whether through a private carrier, state-assigned risk pool or BWC’s Other States Coverage program.
And if you do choose BWC’s program, you can receive an Application Services Fee of $50 for each policy placed in BWC’s other states coverage program (both new and on renewal).
I reached out to Kendra DePaul, manager of BWC’s Other States Coverage program, who indicated the program continues to grow.
At the one-year mark, the program had $1,174,753 in written premium.
As of July 06, 2018, there are 416 active policies with a total premium volume of $4,272,197.
Additionally, $9,150 has been paid in fees to agents on 183 policies.
While I had her ear, I asked Kendra to share some of the most common questions that she receives from agents and employers.
Can I endorse the policy for additional insured?
BWC’s Other States Coverage offering does not offer an endorsement for additional insured.
Adding a named insured is only allowed on a workers’ compensation policy if there is common ownership between the entities.
A completed ERM-14 is required for any additional insured.
Can a waiver of subrogation be added?
An endorsement is available in most states to waive subrogation rights.
In some states there is a charge to add the waiver.
Can permanent out-of-state operations be covered through BWC’s Other States Coverage Program?
Yes. Coverage is available for both temporary and permanent locations as long as they meet the eligibility requirements (business is headquartered or primarily located in Ohio, they maintain active coverage with BWC, 2/3 of their payroll is in Ohio, etc.).
When filling out the ACORD 130, please explain the specific business situation in the Nature of Business/Description of Operations section.
Does the application have to be signed? Can we have the employer sign it later?
A signature is required on the ACORD 130 before we can complete a quote.
The signature on the application is what gives us permission to pull the employers Ohio’s BWC-specific information to use in the underwriting process.
Interested in learning more about BWC’s Other States Coverage Program?
Check out the Other States Coverage Fall 2017 Newsletter or visit OIA’s Other States Coverage resource page to access webinars, agent FAQs, a customizable letter to inform clients of their exposure, and more.
OIA’s resource page
Independent agency succession planning can be a touchy subject, regardless if you’re considering an internal transfer or external sale.
Giving up your agency for any reason can be a bittersweet process, but placing the proper value on your agency is an extremely important part of the process and not something you should take lightly.
It’s important to work with a valuation partner who understands that valuing and perpetuating an agency is about more than a number.
This is why Ohio Insurance Agents Association (OIA) has stepped in to the agency valuation arena.
We bring a compassionate team of experts to guide you through the steps to perpetuate internally or externally. We understand that your agency is your lifeblood, your reputation and your legacy.
OIA Chief Operations Officer Carey Wallace said it best:
“We’re not interested in trying to drive agents toward one particular solution for their agency. We just want to make sure that agents have all of the information they need in order to make the best decision.”
Time moves fast, and whether the time to sell or exit your agency is now or in 10 years, you should be thinking about this day well before it occurs.
Simply passing your agency on to a family member? That may seem easy, but there is a lot of work involved to ensure your future family get-togethers aren’t ruined by the resentment of a (perceived) bad business deal.
It’s just as important when selling your agency externally to another retail agent, a large broker or even private equity. If you’re simply taking their offer without conducting your own valuation, how do you know you’re getting the best value for your agency?
That’s why gaining an unbiased understanding of your agency’s value from OIA can help you make the most informed decisions about the future of your business.
OIA represents agencies of every size, from small, family-owned businesses to large agencies with multiple locations.
Our valuation services are specifically tailored to small- to mid-sized agencies that are often overlooked by the incumbent valuation providers.
Whether you’re perpetuating internally, selling your agency to a third party, or even purchasing another agency – OIA is here to be your trusted advisor.
Our valuation services were exclusively developed to empower you with the tools you need to plan your agency’s perpetuation.
Do you know the value of your agency? We’re here to help. Contact OIA today at (800) 555-1742 or visit our Valuation Assistance page to get started!
About Ohio Insurance Agents Association
Ohio Insurance Agents Association (OIA) is the collective voice of 1,300 independent agencies that employ nearly 10,000 Ohioans. We promote, progress and protect the professional advice and guidance only independent insurance agents provide. OIA members write 82 percent of the commercial insurance policies and 44 percent of personal insurance policies in Ohio. OIA helps agents by providing agency valuation, succession planning, generational health, operational benchmarking reports, other business solutions and industry thought leadership.
The Ohio Supreme Court heard oral arguments earlier this month in a case regarding the duty of insurers with respect to property damage caused by the defective work of subcontractors.
In Ohio Northern University v. Charles Construction Services, Inc. v. KCL Framing, LLC., et al., the court will decide whether an insurer has a duty to defend and indemnify general contractors against claims that owners suffered property damage due to the defective workmanship of the general contractor’s subcontractors.
Round one: Cincinnati Insurance Company
The trial court in this case granted summary judgment for the insurer, Cincinnati Insurance Company.
Cincinnati argued that their policies do not provide the coverage requested by Charles, specifically for defective workmanship and misrepresentation.
Their argument was based on a 2012 decision in Westfield Ins. Co. v. Custom Agri Systems in which the Ohio Supreme Court ruled that a claim of defective construction or workmanship isn’t a claim for ‘property damage’ caused by an ‘occurrence’ as defined by an industry-standard CGL.
Ultimately, the trial court agreed and found that Cincinnati owed no duty to defend or indemnify Charles against claims of defective workmanship under the CGL policy.
The language in the contract states that the policy kicks in and Cincinnati will pay damages because of property damage which is caused by an occurrence.
The court stated that the CGL does not provide coverage for defective workmanship because that does not constitute an occurrence.
Round two: Reversal
Upon appeal, the Third District Court of Appeals reversed the lower court decision.
They held that the policy is ambiguous as to whether property damage caused by a subcontractor’s faulty workmanship constitutes an occurrence, and if not, whether it was covered under exceptions in the policy.
The court found coverage for “defective workmanship by a subcontractor” under the products-completed clause of the contract.
Impact of the decision
The Ohio Supreme Court is expected to answer the question of whether (and to what extent) an insurer is expected to defend and indemnify a general contractor under a CGL policy for property damage due to defective workmanship by a subcontractor.
It is important to note that the vast majority of states and federal jurisdictions have found that an insurer does have a duty to defend and indemnify a general contractor for property damage claims that arise out of the defective workmanship of a subcontractor.
The makeup of the Ohio Supreme Court is much different than it was six years ago when the 6-1 decision was issued in favor of the insurer in Westfield Ins. Co. v. Custom Agri Systems.
Only two justices who ruled in the majority on that case still sit on the court today: Chief Justice Maureen O’Connor and Justice Terrence O’Donnell.
With this in mind, it will be interesting to see how the current members of the court view this issue and ultimately rule in this latest case to answer the question of whether or not coverage exists for faulty workmanship.
OIA will update you when a decision is issued in this case.
Continued strong investment returns, prudent fiscal management, and falling claims numbers have prompted the Ohio Bureau of Workers’ Compensation (BWC) to recommend another $1.5 billion in premium rebates to Ohio employers this summer, expanding workers' comp savings for employers to $8 billion since 2011.
The rebate, BWC's largest in 20 years, will be voted on at the BWC board's May 24 meeting.
The proposed rebate equals 85 percent of the premiums paid for the policy year that ended June 30, 2017 (calendar year 2016 for public employers).
It would follow $1 billion in rebates issued in 2013, 2014 and 2017, as well as a $15 million rebate in 2016 for counties, cities and other public employers.
Of the proposed $1.5 billion, an estimated $48 million would go to schools and $111 million would go to local government entities. That's on top of $402 million in rebates they have received since 2013 ($125 million for schools, $277 million for others).
With this rebate, BWC will have saved employers $8 billion in workers' compensation costs since 2011 after considering other rebates, credits, greater efficiencies and several rate reductions, including two this year.
If approved, rebate checks will likely be mailed in July and August.
In addition to the rebate, private employers will also see a reduction in their premiums beginning July 1 as a result of a 12 percent reduction approved earlier this year.
The reduction will save private employers $163.5 million on this year's premiums, which are already at their lowest rates in at least 40 years due to a declining number of claims and slow-to-moderate growth in medical inflation.