Income Taxes

12 Months Ended

Dec. 31, 2019

Income tax expense (benefit) consisted of the following:



	Year Ended December 31,
	2019			2018			2017
	(In millions)
Current:
Federal	$	204		$	272		$	(9	)
State	12			18			3
Foreign	9			8			—
Total current	225			298			(6		)
Deferred:
Federal	5			(3		)	(85		)
State	6			(3		)	(9		)
Foreign	(1		)	—			—
Total deferred	10			(6		)	(94		)
Income tax expense (benefit)	$	235		$	292		$	(100	)

The Tax Cuts and Jobs Act of 2017 (“TCJA”), in part, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. TCJA’s change in the federal rate required that we revalue deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. We applied the guidance in SEC Staff Accounting Bulletin No. 118 when accounting for the enactment-date effects of the TCJA in 2017 and throughout 2018.

As of December 31, 2017, we recorded a provisional amount of $54 million for the revaluation of deferred tax assets and liabilities because we had not yet completed our accounting for all of the enactment-date income tax effects of the TJCA under ASC 740, Income Taxes. Upon further analysis of certain aspects of the TCJA and refinement of our calculations in the year ended December 31, 2018, we reduced this provisional amount by $4 million, which is included as a component of income tax expense in the accompanying consolidated statement of operations. As of December 31, 2018, the accounting for all of the enactment-date income tax effects of the TCJA was complete.

A reconciliation of the U.S. federal statutory income tax rate to the combined effective income tax rate is as follows:



	Year Ended December 31,
	2019		2018		2017
Statutory federal tax (benefit) rate	21.0	%	21.0	%	(35.0	)%
State income provision (benefit), net of federal	1.4		1.2		(0.7	)
Nondeductible health insurer fee (“HIF”)	—		7.3		—
Nondeductible compensation	1.2		0.7		2.8
Nondeductible goodwill impairment	—		—		6.6
Worthless stock deduction	—		(1.0	)	—
Revaluation of net deferred tax assets	—		(0.4	)	8.8
Other	0.6		0.4		1.1
Effective tax expense (benefit) rate	24.2	%	29.2	%	(16.4	)%

The effective tax rate was not impacted by the HIF in 2019 and 2017, given the HIF moratorium in each of those years. Our effective tax rate is based on expected income (loss), statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Management estimates and judgments are required in determining our effective tax rate. We are routinely under audit by federal, state, or local authorities regarding the timing and amount of deductions, nexus of income among various tax jurisdictions, and compliance with federal, state, foreign, and local tax laws.

Deferred tax assets and liabilities are classified as non-current. Significant components of our deferred tax assets and liabilities as of December 31, 2019 and 2018 were as follows:



	December 31,
	2019			2018
	(In millions)
Accrued expenses and reserve liabilities	$	35		$	39
Other accrued medical costs	11			12
Net operating losses	13			16
Fixed assets and intangibles	26			30
Unearned premiums	11			9
Lease financing obligation	5			30
Tax credit carryover	11			12
Other	—			3
Valuation allowance	(24		)	(28		)
Total deferred income tax assets, net of valuation allowance	88			123
Prepaid expenses	(6		)	(6		)
Other	(3		)	—
Total deferred income tax liabilities	(9		)	(6		)
Net deferred income tax asset	$	79		$	117

At December 31, 2019, we had state net operating loss carryforwards of $310 million, which begin expiring in 2028.

At December 31, 2019, we had California research and development and enterprise zone tax credit carryovers of $8 million, which will begin to expire in 2024, and foreign tax credit carryovers of $5 million, which expire in 2030.

We evaluate the need for a valuation allowance taking into consideration the ability to carry back and carry forward tax credits and losses, available tax planning strategies and future income, including reversal of temporary differences. We have determined that as of December 31, 2019, $24 million of deferred tax assets did not satisfy the recognition criteria. Therefore, we decreased our valuation allowance by $4 million, from $28 million at December 31, 2018, to $24 million as of December 31, 2019.

We recognize tax benefits only if the tax position is more likely than not to be sustained. We are subject to income taxes in the United States, Puerto Rico, and numerous state jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

The roll forward of our unrecognized tax benefits is as follows:



	Year Ended December 31,
	2019			2018			2017
	(In millions)
Gross unrecognized tax benefits at beginning of period	$	(20	)	$	(13	)	$	(11	)
Increases in tax positions for current year				(9		)	(1		)
Increases in tax positions for prior years	—			—			(4		)
Decreases in tax positions for prior years	—			—			3
Lapse in statute of limitations				2			—
Gross unrecognized tax benefits at end of period	$	(20	)	$	(20	)	$	(13	)

The total amount of unrecognized tax benefits at December 31, 2019, 2018 and 2017 that, if recognized, would affect the effective tax rates is $18 million, $18 million, and $12 million, respectively. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $5 million due to resolution of a state refund claim. The state refund claim will not result in a cash payment for income taxes if our claim is denied.

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. Amounts accrued for the payment of interest and penalties as of December 31, 2019, 2018 and 2017 were insignificant.

We are under examination by the IRS for calendar years 2015 through 2017 and may be subject to examination for calendar year 2018. With a few exceptions, which are immaterial in the aggregate, we no longer are subject to state, local, and Puerto Rico tax examinations for years before 2015.