New Captive Insurance Legislation on the horizon

As I’d written in a previous post, the Internal Revenue Service has forecast that it will more aggressively pursue those captive insurance companies which it determines to be abusive. Most notably on its radar is the so-called 831(b) captive. The 831(b) captive is so-called because it qualifies as a small insurance company pursuant to Section 831(b) of the Internal Revenue Code in that it writes premium not to exceed $1,200,000.00 in a given year. 831(b) captives receive favorable tax treatment on their premiums written.

Two bills are now in Congress one in the House of Representatives, one in the Senate which are intended to address 831(b) captives.

The Senate bill giveth, and taketh away. On the one hand, it would propose to raise the allowable limits of an 831(b) captive to $2,200,000.00, from the current $1,200,000.00. On the other hand, however, it would task the Secretary of the Treasury with creating a report on what it terms the abuse of captive insurance companies for estate planning purposes. Parenthetically, note that it does not term there to be possible or alleged abuse, nor does it question whether the use of a captive for estate planning purposes is legitimate. The entire relevant subsection can be found below:
(b) Study.–Not later than February 11, 2016, the Secretary of the
Treasury shall submit to the Committee on Finance of the Senate a
report on the abuse of captive insurance companies for estate planning
purposes. Such report shall include legislative recommendations for
addressing any such abuses.

The House Bill, however, is much more captive favorable. Like its Senate counterpart, it would also purport to raise the 831(b) limit to $2,200,000.00. However, it does not task the Treasury with looking into perceived abuses of captives.

Creating a task of a governmental body to find presumed abuse is a sort of self-fulfilling prophecy. Any governmental organization that is asked to look into a problem to see if that problem exists will in fact determine that (1) the problem exists; (2) it is very serious; and (3) that organization needs additional funding and manpower to combat the problem.
The takeaway from all of this is that it appears some changes to the 831(b) rules are likely, though it’s unclear whether they will all be positive for the industry.

As with any IRS rule or regulation, there is always a potential for abuse, so this blog post should not be read to imply that abuses or illegalities should be allowed. However, given government’s inherent nature to expand, the Senate bill is coming close to giving Treasury carte blanche to increase its power, reach and budget, and to attempt to restrict 831(b) captive insurers. Here’s to hoping the House bill prevails.