Rules For Micro Captives Contrary to Congressional Intent, Says SIIA

According to the US Tax Code, a captive insurer must qualify as an insurance company for tax purposes. It must pay tax on investment income, but not underwriting income. If there is underwriting profit it can be sent to shareholders as a dividend, or remain as a surplus. Qualifying captives are called micro captives, and they have traditionally been a target of the IRS which views them as entities formed for tax advantages. Now the IRS has proposed regulations that could limit access to captives for small and medium-sized businesses. The proposed rule creates loss ratio requirements of 65 percent, loan back limitations, and a 10-year retroactive period for the provisions. The Self-Insurance Institute of America has submitted formal comments in response, claiming the rule as proposed is contrary to congressional intent. It calls the retroactive period “especially onerous,” and unprecedented in scope. “The finalized regulations should not create listed transactions unless the criteria would only describe transactions that are always tax avoidance, and not vacuum up any other transactions. Under existing case law, that would be very difficult,” says the SIIA.