Health Net 2013 Annual Report Download - page 152

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-48
We maintain a liability for unrecognized tax benefits that includes the estimated amount of contingent
adjustments that may be sustained by taxing authorities upon examination. A reconciliation of the beginning and ending
amount of unrecognized tax benefits, exclusive of related interest, is as follows:
2013 2012 2011
(Dollars in millions)
Gross unrecognized tax benefits at beginning of year ............................. $ 57.3 $ 47.1 $ 21.9
Increases in unrecognized tax benefits related to the
current year......................................................................................... 4.4 2.4 25.2
Increases in unrecognized tax benefits related to prior years................... — 8.0 —
Decreases in unrecognized tax benefits related to a prior year................ (0.2)(0.2) —
Settlements with taxing authorities .......................................................... (1.9) — —
Lapse in statute of limitation for assessment ........................................... (4.0) — —
Gross unrecognized tax benefits at end of year........................................ $ 55.6 $ 57.3 $ 47.1
Of the $59.3 million total liability at December 31, 2013 for unrecognized tax benefits, including interest and
penalties, approximately $9.7 million would, if recognized, impact the Company’s effective tax rate. The remaining
$49.6 million would impact deferred tax assets. Of the $62.7 million total liability at December 31, 2012 for
unrecognized tax benefits, including interest and penalties, approximately $13.3 million would, if recognized, impact
the Company’s effective tax rate. The remaining $49.4 million would impact deferred tax assets.
We recognized interest and any applicable penalties which could be assessed related to unrecognized tax benefits
in income tax provision expense. Accrued interest and penalties are included within the related tax liability in the
consolidated balance sheet. During 2013, 2012 and 2011, ($0.3) million, $1.7 million and $0.6 million of interest was
recorded as income tax (benefit) provision, respectively. We reported interest accruals of $3.7 million and $4.1 million
at December 31, 2013 and 2012, respectively. Provision expense and accruals for penalties were immaterial in all
reporting periods.
We file tax returns in the federal as well as several state tax jurisdictions. As of December 31, 2013, tax years
subject to examination in the federal jurisdiction are 2008 and forward. The most significant state tax jurisdiction for us
is California, and tax years subject to examination by that jurisdiction are 2008 and forward. Presently we are under
examination by various state taxing authorities. We do not believe that any ongoing examination will have a material
impact on our consolidated balance sheet and results of operations.
In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to the
closure of federal and state statutes of limitations for assessment and examination settlements. These resolutions could
reduce our unrecognized tax benefits by approximately $3.1 million.
Discontinued Operation
On April 1, 2012, we completed the sale of our Medicare PDP business to CVS Caremark. For the year ended
December 31, 2012, we recorded tax expense of $18.0 million net against the gain on sale of discontinued operation.
See Note 3 for additional information regarding the sale of our Medicare PDP business. The effective tax rate differs
from the federal statutory rate of 35% due primarily to the impact of non-deductible goodwill impairment and a
reduction in the valuation allowance against deferred tax assets, which resulted from the utilization of capital loss
carryforwards against the gain on the sale of our Medicare PDP business. We had no income or loss and no tax expense
or benefit for discontinued operation for the year ended December 31, 2013.
As a result of the sale, the operating results of our Medicare PDP business have been classified as discontinued
operation in our consolidated statements of operations for the year ended December 31, 2012, and accordingly,
reclassified our results of operations for the year ended December 31, 2011. We recorded a tax benefit of $10.3 million
net against the loss from discontinued operation for the year ended December 31, 2012. We recorded tax expense of
$6.2 million net against income from discontinued operation for the year ended December 31, 2011. The effective