Marsh Settlement - Is Tax Deductible?

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Marsh & McLennan Cos. Recently agreed to an $850 million settlement of bid-rigging charges with New York state regulators, but the company looks likely to end up paying a lot less thanks to a tax deduction that could shave hundreds of millions from the headline figure.

According to the agreement, Marsh can't pay the $850 million bill with insurance. Marsh, which apologized to clients but didn't admit any wrongdoing, had already set aside $232 million to cover settlement costs and announced plans to take a $618 million charge against earnings when it announces fourth-quarter results on March 1.

Since the money was earmarked for restitution to be spread among Marsh clients, the company will likely be able to claim a significant tax deduction on the settlement, according to tax experts. Penalties and fines typically aren't tax deducible, but in Marsh's settlement with New York regulators there was no fine or penalty. Restitution or disgorgement of profits, on the other hand, can typically be claimed as a deductible business expense and have been in past settlements with state and federal regulators.

Depending on the company's tax rate and the amount of the settlement that qualifies for a deduction, Marsh could shave hundreds of millions of dollars off the settlement's cost. Over the past 4 years Marsh's statutory tax rate has been around 35 percent, according to Justin Fuller, an analyst covering the company for Morningstar. At that rate, the company could write off nearly $298 million if the settlement was fully deductible and more than $223 million if three-quarters of the settlement was deductible.

Marsh's settlement also has other potential advantages. By making the restitution fund available to clients nationwide, the firm could head off some settlements with clients and other states' regulators.

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