New Law Could Present Big Opportunity for ‘Small’ US Captives

The US Congress late last year passed a law that presents significant opportunities for those captives that elect to be taxed as small insurance companies under Section 831(b) of the Internal Revenue Code and pay no tax on underwriting income.

Effective January 1, 2017, the limit rose from US$1.2 million to US$2.2 million, a welcome increase especially for those who had advocated for an increase for years. The limit will increase again soon as, effective January 1, 2018, the premium limit will rise to $2.3 million annually. If structured properly, the 831(b) election can provide significant value to owners of all sizes, from the middle market to large companies. With the more than 80% increase, we could see significantly more captives across the US in particular.

The new legislation also calls for additional criteria that must be met in order for the captive to demonstrate appropriate risk diversification. These tests are aimed at captives that currently have been set up for estate-planning purposes. The change provides a reminder that a captive insurance vehicle must always be structured properly to provide appropriate insurance to the business and of the importance of having expert captive advisors.

IRS Scrutiny Expected to Continue
Over recent years, the IRS has scrutinized Section 831(b) elections. We expect the scrutiny to continue.  Nonetheless, Marsh Captive Solutions welcomes the new legislation and believes it will have a positive effect on the captive industry, helping to ensure that only the most experienced captive advisors with a thorough feasibility approach will thrive in the industry.