831(b) Premium Limit Adjustment Set for 2019

The IRS recently released the annual inflation adjustment to the premium limits for the section 831(b) tax election. The 2019 tax year will see the premium limit for small property and casualty captive insurance companies remain at US$2.3 million. Section 831(b) of the Internal Revenue Code allows these small captives to make a tax election so that the premium they take in is not taxed as income. Only their investment income is taxed provided they: 1) don’t exceed the new premium limit; 2) do meet certain new risk distribution and risk shifting requirements and 3) do qualify as an insurance company for US federal tax purposes.

The potential for an annual premium limit adjustment is a result of the provisions set in place under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which was signed into law by President Obama. The PATH Act amended section 831(b) of the US Tax Code affecting the tax treatment of small property and casualty insurance companies. It also increased the maximum allowable premium an insurer can take in and still qualify for the tax election from US$1.2 million to US$2.2 million with inflation adjustment provisions in future years. These changes became effective January 1, 2017.

The initial increase to the premium limit in 2017 caused a spike in interest in the exploration and formation of small captive insurance companies over the course of the year. The subsequent tax year inflation adjustment has continued to open the door for many small to mid-sized companies to explore the operational and financial benefits a captive insurance company can provide to their risk management programs.