The House Ways and Means Committee has proposed a Tax Extenders Bill that provides new legislation on Captive Insurance Companies under Section 831(b). If passed, the new law (effective in 2017) would provide:
- Increases the premium limit from $1,200,000 to $2,200,000 (with later adjustments for inflation)
- Provides a new general diversification requirement that no more than 20% of the net written premiums (or if greater, direct written premiums) are attributable to any one policy holder. This may make it difficult or impossible for 831(b) captives to achieve risk distribution by simply entering into a pooling arrangement.
- There is an alternative diversification requirement, such that a captive that does not meet the requirement above must meet an ownership requirement that is amazingly complicated, but appears to require that the ownership of the Captive and the ownership of the Business are the same (within 2%). Thus, the creation of captives to achieve an estate planning shift of wealth will be a problem for captives that do not meet the 20% rule above.
- In determining whether the 20% rule is met above, attribution rules will apply.
- Every 831(b) insurance company will be required to furnish information to the IRS as requested. This sounds like it may result in a notification requirement similar to the listed transaction rules.
If you have any questions on Captive Insurance Companies, call Mike Lloyd or Steve Pieklik at (412) 454-0200.