The Devil Gets His Due: 831(b)s

devilThe Internal Revenue Service has pumped up the volume on their efforts to go after fraudulent 831(b) captives and their promoters. And although no industry likes the thought of being singled out by our nation’s tax collectors, it is hardly surprising.

Solomon Teague of Captive International recently reported that the IRS has scored some notable victories against abusive micro-captive insurance tax shelters in recent years, with settlement offers to some 200 captives last September. Flush with victory, the IRS has established 12 new examination teams to go after taxpayers using 831(b) captive insurance vehicles to avoid paying taxes, thereby significantly ramping up the pressure that has grown up around these shelters.  It will open additional examinations and use all available enforcement tools, including summonses, to obtain the necessary information, the IRS said in its statement.

The IRS has been concerned about abusive micro-captives for several years. It has named these transactions on its Dirty Dozen list of tax scams since 2014. In 2016, the Department of the Treasury and IRS issued Notice 2016-66, identifying certain micro-captive transactions as having the potential for tax avoidance and evasion.

As Solomon reported, the IRS’s position was bolstered by three US Tax Court decisions, each confirming that certain micro-captive arrangements are not eligible for federal tax benefits, along with settlement offer letters to “up to 200” micro-captives that it suspected were not engaged in legitimate insurance activities. According to the IRS, nearly 80 percent of taxpayers who received its settlement offer elected to accept it. “The IRS has collected huge sums of money in recent months from the settlements it has reached and has amassed quite a war chest. The more it goes after these captives the more money it makes, so it is only logical that it keeps up the pressure,” according to an expert in his article.

VCIA, and others in the industry, has been warning about the impact of these less-than-honest facilities for some time. What the IRS is doing only affects a very small portion of the captive insurance sector, being risk-pooled 831(b) captives. The IRS is not taking any actions against captive insurance companies generally. The IRS is not even pursuing all captive insurance companies that have made the 831(b) election. No Vermont captives have been under scrutiny.

It will be interesting to see how this is reflected in the captive numbers released by the states whose insurance departments made a big deal about mass-licensing so many captives, nearly all of which were 831(b) captives of the risk-pooled varietal. As we have seen before in the captive industry, new captive domiciles will sometimes loosen regulatory standards in order to drive new captive formations – and put out press releases attesting to the growth in their states.

As I said in the beginning, no industry likes the headlines about IRS scrutiny. But I am hopeful this will clean up a particularly bad set of apples in ours.

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President

Zombieland

zombie-rich

It’s a little unfortunate that months and years of good work to close the gap at the NAIC, and with others, on the misconceptions of the regulation of Risk Retention Groups can be set back in what amounts to an instant.

As many of you know, with the hard work and leadership of Sandy Bigglestone and Christine Brown of Vermont’s Department of Financial Regulation, and Sean O’Donnell of the DC Department of Insurance, Securities and Banking, there was much progress on creating a common regulatory approach to RRGs and educating non-domiciliary states to that end under the auspices of the NAIC’s RRG Task Force.

Over the past year, the Task Force has been working diligently to provide additional guidance to both state insurance regulators and industry regarding the registration process for RRGs in non-domestic states. The process started last year with a letter from the National Risk Retention Association (NRRA) citing concerns regarding fees and delays in the review of registration forms, supported by a letter from the VCIA. The discussion that followed also raised concerns from non-domiciliary states, such as incomplete registration forms or potentially non-compliant RRGs. As a result, a drafting group was formed to develop frequently asked questions (FAQ) and best practices documents, and updates to the NAIC Uniform Risk Retention Group Registration Form, which made great progress toward the goal.

Unfortunately, in response to a bill that would expand the Liability Risk Retention Act to allow certain, narrowly defined, RRGs to provide property, zombie tropes about how well RRGs are regulated rose again from the grave. The NAIC sent a letter opposing H.R. 4523, the Nonprofit Property Protection Act, and stated in the letter “RRGs have historically had a higher insolvency rate when compared to admitted insurers.”  The letter was signed by the current NAIC president-elect, Ray Farmer, Director of South Carolina Department of Insurance, among others.

As a joint response from VCIA, CICA and NRRA pointed out, this is simply untrue.  According to a study conducted by the Risk Retention Reporter, which uses data from A.M. Best for the period 1987 to 2017, RRGs had a yearly insolvency rate of 1.2% as opposed to 1.5% for the entire property-casualty and life and health marketplace.  In brief, RRGs during this 30-year period were less likely to become insolvent that traditional carriers.

It is noteworthy that the NAIC did not cite any authority for its conclusion.  And at the actual hearing for the bill this week Chlora Lindley-Myers, Director of the Missouri Department of Commerce & Insurance, repeated the claim – again with no backup data!  RRGs are subject to a different regulatory regime than traditional insurers, but that does not mean that the standard is “lower”. RRG regulation by the domiciliary state is subject to the accreditation process by the NAIC itself.

I hope this does not mean a complete move backward at the NAIC regarding RRGs. I have immense faith in Vermont’s regulators, and other allies in the industry, to keep pushing forward – and finally burying these long-discredited zombies.

To view a copy of the joint letter click here.

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President

And We Are Off!

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Thanks to all of you who joined us for another successful VCIA Legislative Day this week at Vermont’s State House in bustling Montpelier! Our members, including many who came from afar, got to hear from Vermont’s new Secretary of Commerce Lindsay Kurrle, as well as Vermont’s Commissioner of Financial Regulation Mike Pieciak during our luncheon. Later in the day our members met and heard from Vermont’s Lt. Gov. David Zuckerman, speaker of the House Mitzi Johnson, and House Minority Leader Patty McCoy. Although these dignitaries represent different parties under the Gold Dome, what they do have in common is their unwavering support of the captive insurance industry in Vermont.

At our luncheon, special guest economist Jeff Carr unveiled a recently completed economic contribution study of the captive insurance industry in Vermont. Suffice it to say that this industry is a tiny powerhouse here in Vermont! Immediately following, the folks from DFR provided a Q & A session for our members on recent updates and activities at the department. We provided a live stream via Facebook for our members.

In the afternoon, we testified before the House Commerce Committee, where Vermont’s Director of Financial Services, Ian Davis, and I gave updates on VCIA and the state of the industry. New VCIA Board Member, Tracy Hassett, President of EdHealth, did a terrific job describing her organization and the reasons they formed a captive in Vermont. In Senate Finance, Ian and I repeated our testimony and Deputy Commissioner Dave Provost concluded with a review of this year’s captive bill, S-255.

The great news is that the following day, Senate Finance voted out the bill 7-0 clearing the first hurdle in the legislative process. There are several sections of the bill, including lowering the minimum capital for sponsored captives from $250,000 to $100,000. The bill also proposes to expand to sponsored cell captives what we passed last year to all captives: provide flexibility in investments by giving companies the option to follow the old rules or develop a plan for DFR approval. Finally, the bill proposes to clarify disclosure requirements for agency captives – we may have been too prescriptive in the disclosure requirement built into the statute when passed last year.

Please click here to access a copy of the bill.

Thank you again to all of you who participated, and I look forward to hearing from you!

Rich Smith
VCIA President

Happy New Year

hnyHard to believe it is 2020! I hope you all had a wonderful holiday season and happy New Year. I am looking forward to another great year working with all of you in our fine industry. As usual, we are off to a fast start here at VCIA, and I want to remind you of a few events to look forward to in the first half of 2020.

First up, January 22nd is VCIA’s annual Legislative Day in Montpelier, Vermont’s capital. It’s a full day of meeting and hearing from Vermont’s political leaders on the captive industry and issues facing the State broadly. If you have a chance to join us in Montpelier, even for part of the day, please come – it’s the best opportunity for Vermont’s captive industry to put a great foot forward with our State’s leaders.

In March, VCIA will embark on its first-ever Captive Insurance Trade Mission.  The State of Vermont and VCIA will send a delegation of government, regulatory and industry representatives to Mexico to highlight Vermont’s leading captive insurance industry.  Working in collaboration with the U.S. Commercial Service, the trade and promotion arm of the U.S. Department of Commerce’s International Trade Administration, the delegation will lead captive insurance educational forums in Mexico City the week of March 23, 2020.  The goal of this trade mission is to increase awareness of Vermont as the leading U.S. domicile for captive insurance and underscore our state’s mutually beneficial trade relationship with Mexico.

On May 21st,  please join us for our annual Spring Member Mixer which will be held at Champlain College in Burlington, Vermont. This event will include a Q&A session with Dave Provost and his team from the Department of Financial Regulation, in conjunction with a VCIA Board meeting.

VCIA’s Annual Conference will be held August 10th – 13th. This exciting event is a virtual homecoming for the entire captive industry!

That’s just a smattering of events that will also include a number of our renown webinars, and other conferences which Team Vermont attends, such as RIMS, which will be held in May in Denver.  We look forward to connecting with you!

Go to www.vcia.com and register for VCIA Legislative Day today!

Thank you and I look forward to hearing from you.

Rich Smith,
VCIA President

Happy Holidays and See You in 2020

church street christmas

Season’s Greetings and Happy Holidays to all of the VCIA family! It was another great year for captives in Vermont, and next year portends to be even better for the industry as a whole.

As I have talked to many of VCIA’s members in the course of the past month or so, “busy” seems to be the word that encapsulates the tone. I think that has been due to two main factors: the increasing sophistication of risk managers in smaller and medium-sized organizations, and the beginnings of a hardening insurance marketplace.

Vermont is set to add another 20+ captives to its stable of over 1000 licenses by year’s end, notwithstanding the competition, due in large part to Dave Provost and his team at DFR’s continued steadfast regulation, Ian Davis’ doggedness in pursuing captive leads, and captive service providers, who continue to recognize Vermont as the premier captive insurance domicile! Overall VCIA membership has increased 2% this year with 446 member organizations thanks to Janice Valgoi and her tireless work in adding to our roles.

I want to say thank you to VCIA’s Board of Directors for all their support and guidance over the past year to the association. I want to especially thank Wilda Seymour of Franklin Casualty Insurance Company RRG for her contribution as board chair starting in October of 2018, and welcome back Jan Klodowski of Agrisurance Inc. as our chair as of this past October.  Longtime captive expert attorney extraordinaire, Stephanie Mapes of Paul Frank + Collins, came on as our vice-chair.  Many thanks to Andrew Baillie of AES Global Insurance Company, independent consultant Donna Blair, Lawrence Cook of Sedgwick, Dennis Silvia of Cedar Consulting, Anne Marie Towle of Hylant, and Derick White of SRS. And on behalf of the staff, I would also like to welcome Tracy Hassett of EdHealth and Jason Palmer of Willis Towers Watson to the board.

We continue our strong focus on events and on legislative and regulatory issues on behalf of our members. Many thanks to Jim McIntyre, and his partner Chrys Lemon, in Washington and Jamie Feehan in Vermont for their wonderful service to VCIA.   And my great thanks to the VCIA staff! Without their hard work, smarts and enthusiasm, we would not be able to accomplish any of the wonderful things we do for our members.  Thank you to Diane Leach, Elizabeth Halpern, Peggy Companion, Janice Valgoi, Dave Rapuano and Megan Precourt – you are all terrific!

Most of all, thank you for all your support and another great year!

Rich Smith
VCIA President

Mixy Business

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Many thanks to all you who joined us Wednesday night for VCIA’s annual Holiday Mixer. We had around 120 of nearest and dearest friends attend at the Hilton taking time to greet and socialize with fellow VCIA members on a cold and ultimately snowy Vermont evening.

Many thanks to our sponsors of the event: our friends at Crowe right up the street, and the folks of NAMIC Insurance Solutions (NAMICO) who came all the way from Indianapolis! Tim Sullivan, Kristen Strasser, and Ted Doughman braved the “friendly” skies to join us.  It is one of my favorite nights of the year, when friends come together with no agenda except to enjoy each other’s company as we head into the holiday season.

I also want to congratulate David Guerino as SVP & Managing Director of KeyState Captive Management.  Dave was there with some of his fellow KeyState colleagues as well, Jeff Vigne and Alicia Huskes. KeyState is a relatively new VCIA member and just announced plans to establish an office in Burlington, Vermont in early 2020.

Thank you again and I look forward to hearing from you!

Rich Smith
VCIA President

 

Taxing Talk

2019-tax-panelJoin us next week As VCIA presents its annual captive taxation update! On December 12th, a group of noted captive tax specialists will inform you of the latest 2019 tax developments impacting captive insurers. Our panel will provide details on specific tax authorities and court rulings released over the past year to provide further insight into the ever-shaping landscape of captive taxation. The panel will also explore the latest changes from the U.S. Tax Reform bill enacted a couple of years ago, its impact on captives, and how best to plan for year-end.

Our panelists will be Saren Goldner, Partner at Eversheds Sutherland, Kristen Hazel, Partner at McDermott Will & Emery, and Alicia Miller, Tax Senior at Crowe.  Each of these experts are considered respective authorities of captive taxation in their various capacities, and all are members of firms who have a strong presence in the captive industry and work tirelessly for the benefit of all.

This webinar offers a great opportunity for all stakeholders to keep up with the latest tax developments in efforts to make informed decisions at the highest level of corporate governance for your captive.  You will walk away learning about recent changes from the U.S. Tax Reform bill that will affect the status of captive insurers; Washington State’s recent approach toward taxing captive entities and some results of recent court cases;  the basics of Johnson & Johnson’s successful appeal in its $55 million NJ Self Procurement Tax Refund Case; recent developments involving insurance characterization, including risk pools and alternative premium characterization; and the IRS’s continued focus on smaller captive insurance companies and understand best practices learned from the cases in this area.

Click here for more information. I hope you will be able to join us!

Rich Smith
VCIA President