Regulatory and tax issues increase uncertainty among captive insurersReprints
While the landscape for captive insurers is generally stable, regulatory and tax issues have the industry's attention.
“We still have a lot of regulatory concerns,” said Les Boughner, executive vice president and managing director of Willis Group Holding's P.L.C.'s North American captive and consulting practice in Burlington, Vt. “The more additional costs, the less a captive becomes feasible.”
One issue is some states' interpretation of the Nonadmitted and Reinsurance Reform Act of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning self-procurement taxes on premiums paid to captives domiciled elsewhere, which could result in some companies paying more taxes on coverage placed in their captives.
“I think for some clients, that is a factor in thinking about where they want to put their captive and whether they want to redomicile to their home state,” said Brady Young, president and CEO of captive manager Strategic Risk Solutions Inc. in Concord, Mass.
Texas is one state interpreting Dodd-Frank as allowing application of the self-procurement tax. “I am aware of one large Texas-based company that is in the process of moving their captive to Texas,” Mr. Young said.
Mr. Boughner said he sees Dodd-Frank and the self-procurement tax issue “resulting more in branch captives than the movement of captives.”
The best planning is “to have a conservative structure, choose the domicile that makes sense ... taking into account Dodd-Frank and self-procurement taxes, but not just running from one state to another without taking into account whether they really understand captives,” said Phillip England, chair of Anderson Kill P.C.'s captive insurance group in New York.
Another concern, Mr. Boughner said, emerges from corporate tax reform proposals in New York Gov. Andrew Cuomo's current budget, which would move taxation of New York companies to a full unitary basis, including captive companies in the combined group, again increasing captive parents' taxes.
In addition, increased Internal Revenue Service scrutiny of captives is a concern for many, even after a January victory in a long-awaited U.S. Tax Court ruling that held that subsidiaries of Rent-A-Center Inc. are entitled to deduct premiums paid to the company's captive insurer from federal taxes.
“The IRS is very active on audits, and we'll see how that plays out,” said Charles J. Lavelle, a partner at Bingham Greenebaum Doll L.L.P. in Louisville, Ky. “There are more cases in court than there have been for 10 years.”
The increased IRS focus includes looking at 831(b) “micro-captives,” Mr. Lavelle said. “I'd put those in the general context of the IRS being more active in audits. They're auditing big companies as well as little companies.”
Mr. Boughner said he hopes the IRS does examine 831(b) captives that are formed for tax reasons rather than a legitimate insurance purpose.
“We've made a 180-degree switch on 831(b)s. We went from where we said we didn't do them until we realized we did quite a few,” he said. “And every single one that we did had a very strong, sustainable business plan.”
“If the election ever went away, our client base would smile and say, "It was nice while it lasted, but we're happy with the captive,'” despite not being able to avoid federal tax on its premiums, Mr. Boughner said.
Of captives formed simply for tax purposes, “The IRS is the barking dog in the captive business, and the IRS will certainly keep an eye out for that type of captive,” Mr. England said.