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Microcaptive guidance requested ahead of tax law changes

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A coalition of state captive insurance and trade associations has asked the U.S. Treasury Department and the IRS to provide much-needed guidance on the structure and operation of enterprise risk captives — also known as microcaptives — ahead of an impending deadline for certain tax law changes to take effect. 

The IRS had expressed concerns about microcaptives, with the agency featuring them on its annual Dirty Dozen list of “tax scams” and saying that premiums paid by 831(b) captive owners may be double or triple the premiums the owners pay for the same coverage purchased from commercial insurers, or that the owners may pay premiums to the captives for “esoteric, implausible risks.” 

In late 2015, Congress changed Internal Revenue Code 831(b), impacting how these captives operate, effective Dec. 31, 2016, for subsequent tax years. The new law increased the allowable premium threshold to $2.2 million from $1.2 million, but also imposed new limitations on the set-up and use of small and midsize captives, the Simpsonville, South Carolina-based Self-Insurance Institute of America Inc. said Monday in a statement.

The coalition expressed an “urgent need for clarification and guidance” and asked the IRS to promptly issue guidance interpreting the new provisions, according to a letter the coalition sent to the IRS on Monday. Barring that, the coalition asked the IRS to grant transition relief by forgoing enforcement of the new provisions until the guidance can be promulgated and to give the industry a safe harbor for compliance under common practices until the guidance is issued. 

The myriad uncertainties surrounding the new law has made compliance “impossible” for many taxpayers who want to follow all the new requirements but cannot do so because of the lack of guidance, the coalition said in its letter. 

“Further, taxpayers intending to make structural changes in order to comply before the Dec. 31, 2016, deadline face a Catch-22,” the coalition said. “Without guidance, taxpayers will be forced to guess how to comply, and if they do so, they might guess wrong.”

Diversification requirements included in the new law are intended to address abuses of microcaptives, including one provision that mandates no more than 20% of net written premiums come from any one policyholder. However, the new law failed to specify who the policyholder is in the context of reinsurance arrangements and the IRS should provide clear proposed guidance on that definition, the coalition said.