Income Taxes

12 Months Ended

Dec. 31, 2019

The components of deferred income taxes at December 31, 2019 and 2018 are as follows:



	2019		2018
Deferred tax assets relating to:
Retirement benefits	$	211	$	226
Accrued expenses	280		301
Insurance reserves	114		96
Net operating loss carryforwards	4		7
Bad debt reserves	82		104
State income tax	11		32
Deferred compensation	22		20
Unrealized losses on securities	—		41
Other	77		72
Total deferred tax assets	801		899
Deferred tax liabilities relating to:
Investment basis difference	78		52
Unrealized gains on securities	153		—
Intangible assets:
Trademarks and state Medicaid licenses	1,529		1,529
Customer, provider and hospital relationships	239		290
Internally developed software and other amortization differences	528		461
Retirement benefits	194		183
Debt discount	19		27
State deferred tax	77		105
Depreciation and amortization	48		47
Other	163		165
Total deferred tax liabilities	3,028		2,859
Net deferred tax liability	$	2,227	$	1,960

Included as a component of the state deferred tax liabilities above is a net valuation allowance for states net operating losses of $45 and $95, respectively, at December 31, 2019 and 2018.

Significant components of the provision for income taxes for the years ended December 31, 2019, 2018 and 2017 consist of the following:



	2019		2018		2017
Current tax expense:
Federal	$	1,019	$	1,128	$	1,356
State and local	84		78		39
Total current tax expense	1,103		1,206		1,395
Deferred tax expense (benefit)	75		112		(1,274		)
Total income tax expense	$	1,178	$	1,318	$	121

State and local current tax expense is reported gross of federal benefit, and includes amounts related to audit settlements, uncertain tax positions, state tax credits and true up of prior years’ tax. 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, 2019, 2018 and 2017 is as follows:



	2019					2018					2017
	Amount			Percent		Amount			Percent		Amount			Percent
Amount at statutory rate	$	1,257		21.0	%	$	1,064		21.0	%	$	1,387		35.0	%
State and local income taxes net of federal tax expense/benefit	138			2.3		63			1.2		(2		)	(0.1	)
Tax exempt interest and dividends received deduction	(24		)	(0.4	)	(27		)	(0.5	)	(58		)	(1.4	)
HIP Fee	—			—		324			6.4		—			—
Tax Cuts and Jobs Act	—			—		(28		)	(0.6	)	(1,108		)	(27.9	)
Other, net	(193		)	(3.2	)	(78		)	(1.5	)	(98		)	(2.5	)
Total income tax expense	$	1,178		19.7	%	$	1,318		26.0	%	$	121		3.1	%

During the year ended December 31, 2018, we recognized income tax expense of $324, or $1.23 per diluted share, as a result of the non-tax deductibility of the HIP Fee payment. On December 22, 2017, the federal government enacted the Tax Cuts and Jobs Act, which contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. At December 31, 2018, we completed our accounting for the tax effects of enactment of the Tax Cuts and Jobs Act and there was no material change to our 2017 provisional amount. In addition we reclassified, for our interim and annual reporting periods beginning on January 1, 2018, $91 of stranded tax effects from accumulated other comprehensive loss to retained earnings on our consolidated balance sheets.

During the year ended December 31, 2017, we recognized an income tax benefit of $1,108, or $4.14 per diluted share, as a result of the provisional amount recorded related to the remeasurement of our deferred tax balance as a result of the enactment of the Tax Cuts and Jobs Act. The HIP Fee payment was suspended for 2017.

The change in the carrying amount of gross unrecognized tax benefits from uncertain tax positions for the years ended December 31, 2019 and 2018 is as follows:



	2019			2018
Balance at January 1	$	241		$	190
Additions based on:
Tax positions related to current year	1			35
Tax positions related to prior years	—			50
Reductions based on:
Tax positions related to prior years	(63		)	(31		)
Settlements with taxing authorities	(33		)	(3		)
Balance at December 31	$	146		$	241

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.

The amount of unrecognized tax benefits that would impact our effective tax rate in future periods, if recognized, was $140 and $237 at December 31, 2019 and 2018, respectively. Also included in the table above, at December 31, 2019, is $2 that would be recognized as an adjustment to additional paid-in capital, which would not affect our effective tax rate. In

addition to the contingent liabilities included in the table above, during 2017 we filed protective state income tax refund claims of approximately $310. There were no equivalent protective state income tax refund claims filed in 2019 or 2018.

For the year ended December 31, 2019, tax loss contingencies recorded in a prior year were released; therefore, we recognized a net interest benefit of $11. For the years ended December 31, 2018 and 2017, we recognized a net interest expense of $15 and $3, respectively. We had accrued approximately $26 and $37 for the payment of interest at December 31, 2019 and 2018, respectively.

As of December 31, 2019, 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 $(9) to $(102).

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, 2019, the IRS examination of our 2019 and 2017 tax years continues to be in process.

In certain states, we pay premium taxes in lieu of state income taxes. Premium taxes are reported in selling, general and administrative expense.

At December 31, 2019, we had unused federal tax net operating loss carryforwards of approximately $8 to offset future taxable income. The loss carryforwards expire in the years 2032 through 2037. During 2019, 2018 and 2017, federal income taxes paid totaled $1,403, $738 and $1,503, respectively.