3 Major Challenges Insurers Face with 1099 Reporting

This blog was last updated on March 11, 2019

Note: Sovos attended a series of Insurance Accounting and Systems Association (IASA) events in 2018. What follows are some observations from speaking with attendees at those events.

Like any other type of company, insurers are not immune to the complexities of 1099 reporting.

The cumbersome chore, which most insurance companies tend to take on primarily during the January reporting season, is both complex and risky. Getting it wrong can have serious consequences, especially for companies that build their businesses on reliability and trust.

There are financial penalties, which the IRS imposes when companies file 1099 forms late, or with errors, or both. They can add up quickly, but they’re not the only consequences of failing to execute 1099 reporting correctly. Any sort of trouble with the IRS, even if it involves the fairly obscure world of tax information reporting, can damage an insurer’s reputation and cause disruption with customers.

3 common 1099 reporting stumbling blocks for insurers

With all of that in mind, insurers indicated at IASA events that a few issues emerged as their primary obstacles to completing 1099 reporting efficiently and effectively:

Failure to track and incorporate changing regulations

Reporting requirements change constantly, and most companies cannot dedicate internal resources to track new regulations. Many insurers only think of tax information reporting in January during reporting season, but changes happen throughout the year that affect compliance requirements.

For instance, for tax year 2018, life insurers have to deal with two new forms, the 1099-LS and 1099-SB. The 1099-LS is filed by acquirers of life insurance contracts, or any interest in a life insurance contract, in a reportable policy sale. The 1099-SB is filed by issuers of life insurance contracts or policies to report a seller’s investment in the contract and the surrender amount due to transfer in a reportable policy sale.

Failure to keep up with regulatory changes leads to failure to maintain compliance, which leads to negative consequences such as penalties. Insurance companies that use systems for tax reporting that do not or cannot incorporate changes are almost guaranteeing that they will incur penalties. Often, those penalties arrive unexpectedly, and insurers either have to do the considerable work of trying to abate them or pay expensive fines to the IRS.

Lack of efficiency

The seasonal nature of reporting deadlines causes a lot of insurers to think about 1099 reporting only at the end and beginning of the calendar year. But rushing to gather, validate and report tax information leads to inefficiency, overworked employees, high process costs, missed deadlines, filling errors and ultimately penalties.

A more efficient approach is to confirm matches of payee names with tax identification numbers (TINs) as an insurer on-boards 1099 recipients. Performing name-TIN matching throughout the year rather than waiting to do it all at once in December or January leads not only to fewer costly errors but also to more efficient processes (which means fewer hours worked in reporting season). Treating 1099 reporting as a year-round task and automating processes drives efficiency and reduces risk.

Problems with state reporting complexity

In a sense the IRS is just the tip of the iceberg when it comes to 1099 reporting compliance. States have regulations and penalties of their own and are constantly changing requirements themselves. The complexity involved with state reporting is staggering given the number of jurisdictions involved and the differences among their regulations.

Some insurers at IASA events indicated that they didn’t even know state 1099 reporting was required, but it is in most states, with penalties assessed to insurers that fail to do it correctly. Unlike the IRS, which has one set of shifting rules, states vary wildly in what they require insurers to report.

For instance, some states follow the federal form 1099-MISC threshold and require companies to report payments to non-employees of $600 or more. But others have much higher thresholds (Alabama, for instance, at $1500), while still others have lower thresholds (Rhode Island, $100). And then there are those states that have no threshold at all, meaning insurers have to file a 1099 for every party to whom they paid any money at all during the year.

Optimizing 1099 reporting processes

The best way for insurers to mitigate penalty risk and drive efficiency is to partner with a reporting provider that can provide several essential functions:

• Track regulatory changes and incorporate them into a reporting process so the insurers doesn’t have to.
• Centralize reporting processes into a single data source to prevent errors and omissions.
• Automate reporting processes to guarantee consistency and offer features such as automatic name-TIN matching for year-round process efficiency.

Centralized data, automated processes and regulatory changes tracked and baked directly into 1099 reporting functionality are the insurer’s best defense against financial penalties, loss of reputation and other negative consequences that come with failing to master 1099 reporting. Without a trusted guide to 1099 reporting, insurers will continue to struggle with the complexity of the task.