US IRC 831(b) amendments are not a new thing. They happen almost annually. Nothing meaningful has passed into law in recent years. However some change effective for 2016 is a real possibility. Any change will create planning opportunities and challenges (Activity summary below from http://www.captiveglobal.com/831b-legislativeupdates).
Spring 2015 Action in US House and Senate on 831(b) Legislation
This page will supply a running account of important activity in both the House and Senate on amendments to existing 831(b) legislation that will impact small insurance companies, including captives. It is likely to become long, with the most recent updates at the top. We think that it makes sense to keep everything on a single page throughout the coming weeks. We will supply dates for each update.
CaptiveGlobal.com wishes to thank Ryan Work, Senior Director of Government Relations, Self-Insurance Institute of America, Inc. (SIIA) for supplying these updates from Capitol Hill.
July 22, 2015: BREAKING NEWS FROM WASHINGTON, DC: Follow this link to download the 831(b) specifications (‘specs’) issued from the Joint Committee on Taxation (JCT).
In summary, JCT is proposing an outright ban on captive ownership based on familial relations, with a 5% de minimis exception. This prohibition looks to be much broader than trusts, and goes into additional entities and corporate structures. The spec includes language outlining a “consideration” for a broader family rule. Congressional staff is currently reviewing the specs to determine if this proposal adversely affects certain constituencies, particularly family owned mutual companies.
JCT specs are typically issued as a recommendation or response to legislative proposals. It is important to note that JCT’s specs are not an indication that 831(b) legislation is moving any time soon. As previously reported, if any 831(b) legislation were to move at all, the proposal would be most likely be included in the Highway Trust Fund Reauthorization currently being negotiated by the House and Senate, or other end of year tax legislation. Currently, staff does not know whether and when these two legislative vehicles will move, and whether an 831(b) proposal would even be added to these vehicles as they are processed through Congress. As the process continues, we will provide additional updates.
April 29, 2015: House bill HR 1788 was introduced a week or so ago, and was a reintroduction of a bill dropped last Congress.
Shortly after Chairman Hatch introduced captive legislation in the U.S. Senate, Reps. Erik Paulsen (R-MN) and Ron Kind (D-WI) introduced a variant captive bill in the U.S. House of Representatives, which was reported to the Committee on Ways and Means. This legislation, HR 1788, proposes an 831(b) threshold increase to $2.2 million tied to an inflation index with no Treasury study language.
The House legislation is not unexpected and, like the Senate bill, was introduced to assist farm mutuals, which are heavy in both co-sponsoring Member states. Also important, it is a reintroduction of a similar bill introduced last Congress, HR 4647, partly to counter then Ways and Means Chairman Dave Camp’s (R-MI) proposal to eliminate IRC 831(b) as part of his tax reform package. As previously discussed, Ways and Means Committee staff, as well as the Joint Committee on Taxation, have both expressed concerns in the past over captive abuse and have proposed placing restrictions or prohibitions on its use.
With legislation being introduced in the House, it does bring the issue into both chambers as we had expected. Now dealing with two different bills, and not mirroring legislative text, questions remain as to which one will be the main legislative vehicle and how might it be changed during the process. As in the Senate, the House bill may be modified at both the committee level and on the floor under the amendment process. Any differences between House and Senate legislation would require a conference committee or, more likely, an agreement on legislative language that could be attached to a general revenue bill that may come up for consideration.
April 14, 2015 – Legislation is currently being considered in both the U.S. House of Representatives and the Senate that seeks to increase the written premium threshold of IRC § 831(b) from the current $1.2 million to $2.2. Million. There is also the potential for language restricting the future of captive usage.
When Congress first placed IRC § 831(b) in the code in 1986, it intended to extend the tax benefits previously given only to mutual insurance companies to all small insurance companies, encouraging companies to build up reserves to protect against losses, a tool critical to most small and mid-sized businesses.
Recently, concerns have been raised to Congress by the IRS/ Treasury that some of these small captive insurance companies are being marketed for abusive purposes. Instead of the risk management and insurance purposes outlined above, the concern is that some small captives are being marketed only to accomplish estate planning benefits. While structuring the ownership of captives to achieve estate planning benefits is neither unreasonable nor prohibited, the intent of Congress was not to excessively promote that usage.
Because of these concerns, legislative text was considered by the Senate Finance Committee in February of 2015 that, along with a non-controversial goal of increasing the threshold for written premiums under IRC § 831(b) from $1.2 to $2.2 million, would place potentially devastating limitations on the use of captives by businesses. These original restrictions — subsequently removed from the legislative text due to deep seated industry concerns from SIIA and others — would have prohibited the use of reinsurance and limited 20% of net written premiums to a policyholder under a single taxable year for purposes of IRC § 831(b).
The final legislative text passed unanimously by the committee, and introduced earlier this month by Senate Finance Chairman Hatch (R-UT), S. 905, would increase the written premium threshold to $2.2 million without additional restrictions. The legislation also calls for a U.S. Treasury study on the use of captives as an estate planning tool and requests specific legislative language to address abuse, to be completed no later than February of next year.
In terms of additional Congressional action, Chairman Hatch’s bill was simply the formal filing of the legislative language and report passed out of the Finance Committee and has no bearing on the opposition or acceptance of additional restriction language, or an indication that a clean bill is a certainty. It does indicate, however, that the 831(b) proposal is now one step closer to floor consideration, where additional changes and/or amendments to the legislation can and will be proposed.
SIIA Captive Industry Proposal
Understanding the concerns surrounding the potentially abusive usage of captive insurance for estate planning purposes, SIIA and industry participants believe that instead of a broad brush approach that would inadvertently damage an industry that is working well, it would be beneficial if incentives for abusive estate planning designs were curbed in two key areas.
- First, restrict certain ownership structures of captives that use irrevocable trusts to avoid the estate tax. Ownership by a trust that does not accomplish estate tax avoidance should not be restricted.
- Second, restrict the purchase of life insurance using the assets of the captive. Because the premium paid to the captive is deductible by the insured business and not taxed in the captive, a business owner could use this technique to indirectly purchase life insurance with pre-tax dollars.
While putting in place restrictions, the SIIA group believes that it also makes sense to grandfather those who previously entered into captive arrangements within the current parameters of the law. Such a grandfather provision would ensure that small and mid-sized businesses that formed insurance companies before this proposal was enacted are not penalized.