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Captive funding of retiree health benefits is deemed insurance by IRS


In Revenue Ruling 2014-15, the IRS lays out a scenario similar to The Coca-Cola Co.'s in which an employer's voluntary employees' beneficiary association pays retirees' medical claims and is reimbursed by stop-loss coverage purchased from an insurer.

The stop-loss insurer pays a premium to the employer's captive, which reimburses the insurer for all liabilities it assumed under its contract with the VEBA.

In the ruling, the IRS cited a 73-year-old Supreme Court decision. In Guy Helvering v. Edyth Le Gierse, the U.S. high court said for an arrangement to be considered insurance for federal income taxes, both risk shifting and risk distribution must be present.

In the arrangement described in the recent revenue ruling, the IRS said the risks being indemnified are those of the retirees and dependents incurring medical expenses.

When the contract between the VEBA and the stop-loss insurer goes into effect, the employer and the VEBA have the right to cancel coverage.

“Consequently, the risks that are shifted in the situation above are those of the retirees and their dependents and not the risks of the VEBA” or the employer, the IRS said. Those risks are reinsured by the captive under its contract with the stop-loss insurer, with the risks distributed among a large group of individuals.

As a result, the risks under that contract are “insurance risks” and the contract “constitutes insurance for federal income tax purposes,” the IRS ruled.

In addition, because the contract is more than 50% of the captive's business, the captive qualifies as an insurance company, the IRS said in referring to a section of the Tax Code that lays out the 50% test.