Income Taxes

The components of deferred income taxes at December 31 are as follows:



	2016			2015
Deferred tax assets relating to:
Retirement benefits	$	362.9		$	364.8
Accrued expenses	331.9			344.6
Insurance reserves	229.5			247.1
Net operating loss carryforwards	9.2			18.1
Bad debt reserves	119.6			154.8
State income tax	59.8			43.4
Deferred compensation	38.2			40.1
Investment basis difference	42.4			62.2
Other	110.5			68.4
Total deferred tax assets	1,304.0			1,343.5
Deferred tax liabilities relating to:
Unrealized gains on securities	202.9			127.8
Intangible assets:
Trademarks and state Medicaid licenses	2,547.6			2,547.6
Customer, provider and hospital relationships	194.1			269.2
Internally developed software and other amortization differences	450.5			436.6
Retirement benefits	267.3			252.7
Debt discount	60.8			61.9
State deferred tax	106.0			36.4
Depreciation and amortization	54.1			44.2
Other	200.6			197.7
Total deferred tax liabilities	4,083.9			3,974.1
Net deferred tax liability	$	(2,779.9	)	$	(2,630.6	)

The elimination of the valuation allowance during 2015 was attributable to a reduction in a statutory state income tax rate and continued utilization of state net operating losses.

Significant components of the provision for income taxes for the years ended December 31 consist of the following:



	2016		2015			2014
Current tax expense:
Federal	$	1,862.6	$	1,996.6		$	1,629.4
State and local	93.9		133.0			65.8
Total current tax expense	1,956.5		2,129.6			1,695.2
Deferred tax expense (benefit)	129.1		(58.6		)	112.8
Total income tax expense	$	2,085.6	$	2,071.0		$	1,808.0

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:



	2016					2015					2014
	Amount			Percent		Amount			Percent		Amount			Percent
Amount at statutory rate	$	1,594.4		35.0	%	$	1,620.9		35.0	%	$	1,528.8		35.0	%
State and local income taxes net of federal tax benefit	61.5			1.4		75.3			1.6		49.0			1.1
Tax exempt interest and dividends received deduction	(61.7		)	(1.4	)	(63.2		)	(1.3	)	(65.9		)	(1.5	)
HIP Fee	411.7			9.0		422.6			9.1		312.6			7.2
Other, net	79.7			1.8		15.4			0.3		(16.5		)	(0.4	)
Total income tax expense	$	2,085.6		45.8	%	$	2,071.0		44.7	%	$	1,808.0		41.4	%

During the year ended December 31, 2016, we recognized income tax expense of $411.7, or $1.54 per diluted share, as a result of the non-tax deductibility of the HIP Fee payments.

During the year ended December 31, 2015, we recognized income tax expense of $422.6, or $1.55 per diluted share, as a result of the non-tax deductibility of the HIP Fee payments. We also recognized income tax expense of $42.3, or $0.16 per diluted share, as a result of an adverse California franchise tax ruling. This expense is allocated between the "State and local income taxes net of federal tax benefit" and the "Other, net" line items in the table above.

During the year ended December 31, 2014, we recognized income tax expense of $312.6, or $1.09 per diluted share, as a result of the non-tax deductibility of the HIP Fee payments.

The change in the carrying amount of gross unrecognized tax benefits from uncertain tax positions for the years ended December 31 is as follows:



	2016			2015
Balance at January 1	$	212.0		$	115.8
Additions based on:
Tax positions related to current year	—			39.8
Tax positions related to prior years	13.9			65.1
Reductions based on:
Tax positions related to current year	(1.1		)	—
Tax positions related to prior years	(88.4		)	(7.9		)
Settlements with taxing authorities	(5.3		)	(0.8		)
Balance at December 31	$	131.1		$	212.0

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, 2016, $102.4 of unrecognized tax benefits would impact our effective tax rate in future periods, if recognized. Also included in the table above is $2.4 that would be recognized as an adjustment to additional paid-in capital, which would not affect our effective tax rate.

For the years ended December 31, 2016, 2015 and 2014, we recognized net interest expense (benefits) of $6.6, $(1.8) and $(4.2), respectively. We had accrued approximately $18.9 and $12.3 for the payment of interest at December 31, 2016 and 2015, respectively.

As of December 31, 2016, as further described below, certain tax years remain open to examination by the Internal Revenue Service, or 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 $3.1 to $(75.1).

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, 2016, the IRS examination of our 2016 tax year continues to be in process. During 2016, the examination of our 2015 tax year was resolved 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, 2016, we had unused federal tax net operating loss carryforwards of approximately $19.0 to offset future taxable income. The loss carryforwards expire in the years 2017 through 2034. During 2016, 2015 and 2014, federal income taxes paid totaled $1,665.2, $1,952.1 and $1,659.0, respectively.