Health Net 2014 Annual Report Download - page 76

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Income Tax Provision
Our income tax expense (benefit) and the effective income tax rate for the years ended December 31, 2014, 2013 and
2012 are as follows:
2014 2013 2012
(Dollars in millions)
Continuing Operations:
Income tax expense from continuing operations...................................... $54.2 $99.8 $6.0
Effective income tax rate for continuing operations................................. 27.1% 37.0% 18.9%
Discontinued Operations:
Income tax benefit from discontinued operation A................................... $(10.3)
Effective income tax rate for discontinued operation A............................ 35.8%
Income tax expense from gain on sale of discontinued operation B......... $ 18.0
Effective income tax rate for gain on sale of discontinued operation B
.... 13.5%
_______________
A - For the years ended December 31, 2014 and 2013, we had no discontinued operations; therefore, income tax expense
from discontinued operation and the corresponding effective income tax rate are not applicable.
B - For the years ended December 31, 2014 and 2013, we had no sale of a discontinued operation; therefore, income tax
expense from gain on sale of discontinued operation and the corresponding effective income tax rate are not applicable.
Continuing Operations
The effective income tax rate for continuing operations was 27.1% and 37.0% for the years ended December 31,
2014 and 2013, respectively. For the year ended December 31, 2014, our effective tax rate was adversely impacted by the
health insurer fee required by the ACA. The $141.4 million that we paid in 2014 for the health insurer fee is not deductible
for federal income tax purposes and in many state jurisdictions. The non-deductible health insurer fee increased our
effective tax rate for the year ended December 31, 2014 by 24.8 percentage points. In addition, we incurred a Section 165
(g) loss on the stock of one of our subsidiaries that created a tax benefit during the period of $73.7 million, net of
adjustments to our reserve for uncertain tax benefits. This tax benefit was primarily responsible for reducing our effective
tax rate below the statutory federal tax rate of 35% for the year ended December 31, 2014. Other items which caused our
effective income tax rate to differ from the statutory federal tax rate of 35% for the year ended December 31, 2014 include
state income taxes, tax-exempt interest, and non-deductible compensation. See Note 11 to our consolidated financial
statements for additional information. The effective income tax rate was higher than the statutory federal tax rate of 35%
for the year ended December 31, 2013 primarily due to state income taxes, tax-exempt investment income, and non-
deductible compensation. Our tax rate for the year ended December 31, 2012 was lower than the statutory federal rate of
35% primarily due to the effect of tax-exempt income and reductions of valuation allowances against deferred assets,
which resulted from the utilization of capital loss carryforwards against gains on sale of marketable securities. Such
beneficial impacts were partially offset by the effect of certain compensation treated as non-deductible under the ACA. In
all periods presented, our effective income tax rate has not been impacted by operations in foreign jurisdictions with
varying statutory tax rates. Our health care operations are almost entirely domestic. In 2015, we expect our effective
income tax rate will exceed 50% as a result of the non-deductibility of the health insurer fee under the ACA.
Discontinued Operations
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 to our consolidated financial statements for additional information regarding the sale of
our Medicare PDP business. An effective tax rate was only applicable to the year ended December 31, 2012 because that is
the only period for which a gain on sale of discontinued operation was recorded. The effective tax rate differs from the
federal statutory rate of 35% due primarily to the impact of nondeductible 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.
Also in connection with the sale of our Medicare PDP business, we classified the operating results of our Medicare
PDP business as discontinued operation. We recorded tax benefits of $10.3 million against losses from discontinued
operation for the year ended December 31, 2012. The effective income tax rate related to loss from discontinued operation
for the year ended December 31, 2012 was slightly above the federal statutory tax rate of 35% due to state income taxes.
The effective income tax rate on the gain on sale of discontinued operation varied from the statutory federal rate of 35% for