Friday the 13th

Friday13thThe captive industry had a very interesting fire drill this week when, unbeknownst to almost everyone, the U.S. Senate committee on finance scheduled a hearing to walk through a few tax proposals, including proposed modifications to the 831(b) tax election for small insurances companies.

Under the title of DESCRIPTION OF THE CHAIRMAN’S MARK- RELATING TO MODIFICATIONS TO ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE COMPANIES, the Senate finance committee was about to proceed on what they deemed non-controversial tax bills. This provision would have increased the premium ceiling from $1.2M to $2.2M and indexed for inflation; disallowed the election if direct net written premium from a single policyholder exceeds 20% (single policyholder to include all members of the same controlled group); and disallowed assumption reinsurance.

This proposal would have all but killed the program for the captive insurance industry. Now, while I have for some time identified issues that I see as abuse of the 831(b) program by those looking to avoid tax as opposed to legitimate small insurance companies, it was a bit of shock to see this on what I would call part of an arcane Senate procedure.  Once the chair of the committee, Sen. Orrin Hatch of Utah, was made aware that this was especially galling to his home state’s captive industry, a new document came out the day of the hearing called the “Description of the Chairman’s Modifications to the Chairman’s Mark Proposal” removing the requirement that no more than 20 percent of its net written premiums be attributable to any one policyholder (along with the associated reporting requirement) and the prohibition on reinsurance.

Add on top of this the recent IRS press release about their “Dirty Dozen” tax schemes that highlighted the abuse with 831(b) captives, it behooves the captive insurance industry as a whole to pull together and offer a viable solution to this ongoing issue.  Let’s not wait for the next arcane procedure to catch us short!

Thank you all very much, and I look forward to hearing from you soon.

~Rich

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