Health Net 2014 Annual Report Download - page 161

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-51
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:
2014 2013 2012
(Dollars in millions)
Gross unrecognized tax benefits at beginning of year ............................. $55.6 $57.3 $47.1
Increases in unrecognized tax benefits related to the
current year......................................................................................... 25.5 4.4 2.4
Increases in unrecognized tax benefits related to prior years................... — — 8.0
Decreases in unrecognized tax benefits related to a prior year................ (17.5)(0.2)(0.2)
Settlements with taxing authorities .......................................................... —(1.9) —
Lapse in statute of limitation for assessment ........................................... (2.1)(4.0) —
Gross unrecognized tax benefits at end of year........................................ $61.5 $55.6 $57.3
Of the $64.9 million total liability at December 31, 2014 for unrecognized tax benefits, including interest and
penalties, approximately $19.6 million would, if recognized, impact the Company’s effective tax rate. The remaining
$45.3 million would impact deferred tax assets. 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.
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 2014, 2013 and 2012, ($1.9) million, ($0.3) million and $1.7 million, respectively,
of interest was recorded as income tax (benefit) provision. We reported interest accruals of $1.8 million, $3.7 million
and $4.1 million at December 31, 2014, 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, 2014, tax years
subject to examination in the federal jurisdiction are 2010 and forward. The most significant state tax jurisdiction for us
is California, and tax years subject to examination by that jurisdiction are 2010 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 decrease by up to
$7.2 million due to examination settlements or alternatively increase by up to $2.6 million assuming we are able to
utilize certain net operating loss and tax credit carryforwards that are currently subject to uncertainty.
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.
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. We recorded a tax benefit
of $10.3 million net against the loss from discontinued operation for the year ended December 31, 2012. The effective
income tax rates related to income or loss from discontinued operation remained relatively constant throughout 2012 at
slightly above the federal statutory tax rate of 35% due to state income taxes. We had no income or loss and no tax
expense or benefit for discontinued operation for the years ended December 31, 2013 and 2014.