from the Internal Revenue Service (IRS) after they were labelled as
“transactions of interest” in Notice 2016-66 in November 2016.
The IRS has audited more of these captive structures in the belief
that small businesses are using them to insure against improbable
risks that they never pay claims on, and the premiums then return
to the business owners with little to no tax.
“The past few years have been a bumpy ride for the captive
insurance industry which, as any, wants regulatory certainty,” says
Ryan Work, vice president of government relations at the Self-
Insurance Institute of America (SIIA).
“The increased premium deducibility threshold amount, now tied
to inflation, certainly makes ERC captives more attractive. Similarly,
the PATH Act provisions put in place to temper abusive behaviour
are a positive step for the industry overall.
“At the same time, the burdensome requirements imposed by
Notice 2016-66, along with recent court decisions such as Avrahami
and Reserve Mechanical, have tempered the attractiveness of
captives for some owners.”
Despite the regulatory pressure, Work says, the small captives
sector has been and will continue to be an attractive risk vehicle for
business owners seeking to mitigate appropriate alternative risks in
the right way.
He continues: “Like many policy and regulatory activities in
this past, this too shall pass. In the meantime, it is essential that
the industry take proactive steps forward, while at the same time
continuing to educate policymakers and regulators at the state and
federal levels on captive insurance in general.”
Changes to the PATH Act
On March 23, President Donald Trump signed into law HR 1625, the
Consolidated Appropriations Act 2018.
The act contains technical corrections that amend IRS Code Section
831(b) by adding clarifications to the diversification requirements
imposed by PATH Act of 2015.
“The Consolidated Appropriations Act 2018 clarified some points
that were ambiguous under the PATH Act of 2015. The US Congress’
Joint Committee on Taxation’s explanation is very helpful, as the
industry reviews the language in the new law,” says Charles Lavelle,
senior partner at Bingham Greenebaum Doll.
Under the PATH Act, 831(b) captives are required either to have
no more than 20 percent of premiums from one policyholder or
to meet certain ownership tests intended to remove any estate tax
planning capability in the captive’s ownership.
Amy Lewis, vice president of Captive Resources, says that the
language of this act had left many with questions on the actual
application of the rules.
One of the ways the act amended the language of the PATH Act
was to define a policyholder as “each policyholder of the underlying
direct written insurance with respect to such reinsurance or
Lewis explains that this language allows a captive that is a member
of a risk management pool to ‘look through’ the reinsurance to
consider each insured in the pool as a policyholder for the purposes
of this test, alleviating a concern that the pool could be considered a
single policyholder for the test.
The act also modified the ownership test language, eliminating
spouses (unless they are not a US citizen) from the definition of a
specified holder and providing an aggregation rule for certain spousal
interests, and expanding the definition to include stepchildren and
other descendants which, Lewis says, clarifies some of the ownership
questions arising from the act.
It also adds a concept of “relevant specified assets” to aggregate
the holdings of the assets for the purposes of comparing a specified
holder’s ownership in the captive to the ownership of insured assets.
“The insured assets are not considered separately under the
modified language, which restricts the ownership of specified
holders in applying the de minimus test. While this is a clarification
of the prior language, it still does not fully address how to determine
the amount of interest held by a specified holder,” says Lewis.
She concludes: “I believe that it is a good first step to helping
interpret the PATH Act legislation, and helpful, but more guidance
and clarity would be welcomed by taxpayers and practitioners.”
The SIIA engaged with Congress several years ago to help shape
the PATH Act, and has continued to work with policymakers to seek
needed clarification to some of the ambiguous language in the
Work adds: “The PATH Act clarifications passed as part of this
year’s omnibus appropriations bill did indeed help clarify issues
surrounding spousal ownership, along with the definition and
calculation of specified assets within the original law.
www.captiveinternational.com US Captive 2018 21