Tax & Assurance Guidance

831(b) – Captive Insurance Company

Posted on August 13, 2014 by

Sue Tuson

Sue Tuson

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Considering a Captive Insurance Company

Many companies may encounter a situation where the premium to cover an insurable risk in their business comes with a very high price tag. The Section 831(b) captive insurance company (“CIC”) has become an attractive option for small to midsize companies looking for a way to manage their risks in a cost-effective way.

What is a Captive Insurance Company?

An 831(b) captive is an entity that holds an insurance license, and has made an election under Section 831(b) of the Internal Revenue Code that allows insurance companies with less than $1.2 million in premiums to be taxed on their investment earnings rather than their gross income. In order to qualify for this favorable tax treatment, a CIC must be insuring “real risks,” and must provide “risk shifting” (risk must be transferred from an operating company to the CIC for a reasonable premium), and “risk distribution” (CIC must accept risk from multiple operating companies. This can happen either directly or by unrelated companies participating in risk pool arrangements.)

Captive Insurance Company Tax Benefits:

  • Insurance coverage for risks that may be “uninsurable” in the retail market.
  • CIC tax savings – CIC pays tax on investment earnings versus gross income. This allows funds to accumulate for claims in the future on a pre-tax basis.
  • Tax deductible premiums for operating company – Even though the CIC does not pay tax on premiums under $1.2 million, the company paying those premiums may still deduct those payments for federal tax purposes.
  • Lower premiums than retail insurance.
  • Insurance policies tailored to meet specific needs.
  • A means of wealth accumulation and potential estate planning strategy.
  • Asset protection from the claims of creditors.

Who is a Candidate for a CIC?

A CIC may be a very viable option to investigate if:

  • Your company is profitable and has ample cash flow to pay insurance premiums.
  • Your company is part of a related group with multiple entities that would be interested in pooling insurance risk.
  • Your company has not experienced significant insured losses in the past, yet the cost of insurance is still rising.
  • Insurance is a significant cost for your company. In order to outweigh start-up costs and on-going maintenance costs, CICs make sense for companies currently paying high insurance premiums.
  • Your company owners are interested in new wealth accumulation and transfer ideas.

The proper formation and maintenance of a CIC (and assistance from qualified professionals) is key to the success of this tax savings strategy.

If your traditional insurer or self-insured plan is not meeting your needs, please contact your tax advisor to discuss whether a CIC could be the risk management solution that you are looking for.

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Sue Tuson

Shareholder, International Tax

As an international tax advisor, Sue helps businesses structure their operations globally to mitigate tax costs and maximize profits.

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