A Change In strategy
Originally published in Captive Healthcare Guide.
Phillip England and Randall Beckie of Anderson Kill break down how new tax rules might prompt achange in group captive insurance arrangements
We would like to share the following idea from our captive insurance advisory practice. There is more to say about it than space allows here, and you should always consult a professional tax adviser about this and potentially other captive planning ideas. We remind you that you cannot rely on a magazine article as authority for your tax interpretation. Having said that, here's the kernel of an idea that, with a bit of help, some group captives might find useful.
Group captive insurance arrangements, such as risk retention groups (RRGs) for physicians' practices, historically have left on the table the type of tax benefit that closely-held and middle-market businesses often try to qualify their captives for: namely, legitimate tax exemption. A small insurance company, including a captive, may qualify for tax exemption under one of the following provisions of the US tax code:
Under §831(b), a non-life insurance company may exclude its net underwriting income from tax in any year for which its written premiums do not exceed $1.2m. Under §501(c)(15), an insurance company is altogether exempt from tax if its gross receipts do not exceed $600,000 (50%+ of which must be premiums and the remainder of which may include investment income), provided that there are (generally speaking) no other revenue-generating 'C' corporations that are commonly controlled by the owner(s) of such an insurance company. For a group captive, the obstacle has been that premium volume generally exceeds $1.2m. However, since the IRS' issuance of Revenue Ruling 2008-8, it may be possible to structure a group captive's income to qualify for tax exemption under §831(b) or §501(c)(15) by dividing the underwriting income into pieces that are allocated back to the group's members via reinsurance to segregated cell captives that are owned by the members. Let us explain by example.
A tax-efficient group captive
Seven unrelated physician's practices form and own a RRG that writes coverage earning $700,000 of premiums from each of them, collectively pooling $4.9m of premiums. The RRG is organised as a segregated accounts company (SAC) that forms seven segregated cells. Each physician's practice is the sole participant and beneficial owner of a segregated cell. Each cell writes $500,000 of...
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