IRS ruling on Coca-Cola captive insurer could start retiree benefit funding trendReprints
An Internal Revenue Service ruling, triggered by The Coca-Cola Co.'s trailblazing plan to fund retiree health care benefits through a trust and its South Carolina-based captive insurer, opens the door for other employers that want to utilize the approach.
In its ruling earlier this month, the IRS said such an arrangement would constitute insurance and the captive would be considered an insurer. As a result, experts say, premiums paid by the parent to the captive and the reserves established by the captive would be tax-deductible.
While corporate interest in the approach is not widespread, it will appeal to some employers with large retiree health care obligations and the financial resources to fund the obligations, experts say.
“It will appeal only to those companies that have a significant potential financial gain by funding retiree medical,” said Mitchell Cole, Stamford, Conn.-based managing director of Towers Watson & Co.'s retiree insurance solutions unit.
Several companies are examining the retiree benefit funding approach, consultants said.
Atlanta-based Coca-Cola, which describes itself as the world's largest beverage company with nearly $47 billion in 2013 revenue, first put forward the idea in 2008.
In its request to the Department of Labor for regulatory approval, Coca-Cola proposed using assets in a voluntary employees' beneficiary association, a trust it established in 2006 with $216 million in assets, to purchase stop-loss coverage from Prudential Insurance Co. of America.
The stop-loss insurance would cover claims for about 4,000 retirees and dependents between an attachment point of $100 and an upper limit of $5,800 for retirees younger than 65 and $3,500 for retirees 65 and older.
In turn, Prudential would reinsure the risk with Red Re Inc., Coca-Cola's South Carolina-based captive.
The arrangement cleared its first hurdle in 2010, when the Labor Department approved the proposal. The federal agency requires employers that want to fund employee benefit risks through their captive insurers to meet conditions, such as enhancing participants' benefits and using a highly rated commercial insurer to issue policies.
However, before putting the program in place, Coca-Cola sought a private letter ruling from the IRS on the tax issues. Years passed and, without explanation, the IRS earlier this month went further by issuing Revenue Ruling 2014-15, which other employers can cite when seeking regulatory clearance for their captive benefits funding arrangements( see related story).
“The Coca-Cola Co. is thoughtful when it comes to tax matters, so we asked the IRS to confirm our understanding of the law in this area. The company decided that the most prudent course was to request an official ruling from the IRS,” Coca-Cola said in a statement reacting to the IRS ruling.
By resolving tax issues, observers say the ruling clears the way for other employers to utilize their captives to fund retiree health benefits.
“The IRS revenue ruling appears to provide clarity and support for plan sponsors interested in using their captive insurance company for financing retiree medical” coverage, Prudential said in a statement.
“Whether a captive is an insurance company for purposes of U.S. tax determines if the transaction is insurance or self-insurance,” Mr. Cole said. “If it is insurance, the captive would establish reserves for its anticipated claim payments, which would be tax-deductible.”
Karin Landry, a managing partner at Spring Consulting Group L.L.P. in Boston, described the ruling as “exciting news.”
“Companies can set aside money to fund a liability, like retiree medical, and can do so in a most cost-efficient manner because they are using their own captive insurance vehicle. I'm excited by it,” Ms. Landry said.
“The ruling makes clear that captives writing a single policy still can be considered an insurance company as long as that policy covers employee benefit risks,” said Nancy Gerrie, a partner at McDermott, Will & Emery L.L.P. in Chicago.
While not anticipating a surge of activity due to the ruling because of the time and expense of working out captive benefit funding arrangements, benefit experts say the ruling will boost employer interest.
The ruling provides “greater clarity” to this approach, said Terry Richardson, a principal at PricewaterhouseCoopers L.L.P. in Dallas.
“There continues to be a lot of experimentation, and the guidance has kept up with that,” said George O'Donnell, technical director of global risk consulting at Aon Risk Solutions in Somerset, New Jersey.