Ruling opening up captives to fund benefits hits 35th anniversaryReprints
Thursday marks the 35th anniversary of a U.S. Department of Labor ruling that opened the door for employers to use their captive insurance companies to fund employee benefit risks.
On Aug. 7, 1979, the Labor Department published a ruling — officially known as Prohibited Transaction Exemption 79-41 — that eased a near-impossible Employee Retirement Income Security Act test that employers had to meet to fund benefits through their captives.
Under that ERISA test, an employer could fund benefit risks through its captive only if at least 95% of the captive's business was unrelated to the parent — a test few employers could pass.
But under 79-41, that 95% test was eased. The Labor Department said an employer could use its captive to fund employee benefit risks as long as 50% of its captive business was not related to its parent and the captive was licensed in a U.S. state.
The big breakthrough for captive benefit funding came two decades later when Labor Department officials gave new ways for employers to use to try to win regulatory permission to fund benefits in their captives — ways that did not center on how much of the captive's business was related to the parent.
To win regulatory approval under that later guidance, employers had to sweeten benefits that were to be funded through their captives, as well as use a top-rated insurer to issue policies, among other things.
Employers responded to their new regulatory flexibility with more than two dozen organizations — including such well known ones as Alcoa, Inc., Archer Daniels Midland Co., Google Inc., Microsoft Corp. and United Technologies Corp. — winning regulatory approval to fund benefit risks through their captives since 1999.
More recently, though, the move to fund benefit risks through captives has slowed. Just two employers — The Coca Cola Co. and Intel Corp. — have won approval since 2013 to use captives to fund employee benefit risks.
One key factor was a Labor Department suspension in 2012 of a way, known as Ex-Pro, that employers could use to get rapid regulatory review of their captive benefit funding applications. That suspension was lifted late last year.
In addition, the retirement in 2012 of Gary Lefkowitz, a veteran Labor Department attorney who reviewed most of the captive benefit funding applications, reduced the department's resources in the area.
Still, captive benefit funding experts say employer interest in captive benefit funding continues, and they expect new applications to be filed in the coming months.
“Using a captive to fund employee benefits always made lots of financial sense,” said Mitchell Cole, a Towers Watson & Co. managing director in Stamford, Connecticut. “While interest remains good, development in terms of number of captives has grown steadily but modestly over time. But this may well change in the future as finance and HR continue to forge closer working relationships to achieve cost and risk savings.”
“Interest in benefit funding in captives remains at an all-time high,” added Karin Landry, a managing partner with Spring Consulting Group L.L.C. in Boston.