831(b) - Too Good to Be True?
How many times have we heard the old adage, when describing an incredible opportunity, “It’s too good to be true”. So how do we know if a business or investment opportunity is literally too good be true, or simply, an excellent opportunity serving the business and business owner(s)?
Speak with a professional representative, become educated, perform due diligence and validate platform...then take action. Let's get started with the highlights...
In 1986 and in accord with The Tax Reform Act, President Ronald Reagan worked with congress to add Section 831(b) to the Internal Revenue Code (IRC).
In part as a result of perceived abuses, Congress changed the requirements for qualification under section 831(b) effective for taxable years ending after December 31, 2016, and at the same time increased the premium limitation amount. Section 831(b) now requires an electing company to include
(1) be an insurance company;
(2) have written premiums for the taxable year that do not exceed $2.2 million ($2.3 million adjusting for inflation);
(3) meet the diversification requirements;
(4) make or have in effect, an election to be taxed under section 831(b).
The diversification requirements were added by Congress as anti-abuse measures to address estate and gift tax evasion issues; the amendments do not address federal income tax concerns. Ironically, 95% of service providers had already adopted these 'rules' and were serving respective clients compliantly.
With your 831(b) captive being first a legitimate insurance organization, there are substantial benefits. This is why 90% of Fortune 500 companies have some form of a captive and more than 70,000 middle market business leaders employ this powerful and flexible business tool. Deliverables/Outcomes include:
(1) your insurance company helps to mitigate business risks - often those which are not insured or under-insured
(2) you/your team can adjudicate claims with respect to insured risks
(3) your premium is held/owned by the insurance company with an EIN and US Tax ID; the premium (reserves held within structure) are protected assets
(4) remitted premium into your insurance company is a business expense (not taxed as profit or income); there provides for a significant tax-advantaged environment
Best Practice Recommendations
Upon setting up and serving hundreds of clients in every US state, Reinsurance Specialties (and our sister companies CCFC and Insurance Specialties) has made key observations with regards to client candidacy, actuarial studies, platform structures, claim remittance, loan structures, distributions and more. Below are some key decision points, discussion topics and recommendations: (1) Warren Buffett’s top rule of investing is “Don’t invest in something you don’t understand.” There are many investment opportunities we don’t fully understand – the stock market, for instance! That doesn’t mean we shouldn’t invest in the stock market. It does, however, mean that before acting on a strategy, we seek the advice of wise advisors and understand the risk/reward. Do not invest in an opportunity that seems overly complicated! Which brings us to our next point... (2) Do your homework. Explore and understand the deliverables with each micro-captive opportunity. Research their track record. Ask for referrals from peer clients. (3) Ensure the service provider you choose recommends/facilitates a third-party actuarial study and uses a licensed actuary to assess your specific business risk. This important activity build/legitimizes your insurance organization by way of policy/premium. Bonus Idea: Ask to see an actuarial summary snapshot (redacted but representing clients in your industry) which showcases a current-client example. (4) Ensure the service provider you choose domiciles your insurance organization legitimately and compliantly. In the last several decades, a popular trend was to domicile organizations in the Bahamas, Bermuda, Turks and Caicos, and other foreign destinations.
It should be noted that for most tax purposes, there is little difference between an offshore captive (one formed outside the United States) or a domestic one, since the vast bulk of captives make the election under Tax Code § 953(d) to be treated as a domestic company. These days, the reasons for a captive to "go offshore" most often relate to those relatively few captives that for tax reasons do not make the § 953(d) election (captives owned by charitable organizations, for instance, have tax reasons for wanting to be taxed as a controlled foreign corporation instead), or captives where financial privacy or practical immunity to the enforcement of a domestic judgment is at a premium. Bonus Idea: Choose to domicile with a specific state, native tribe or domestic entity to avoid unnecessary complications and bureaucratic red tape related to foreign entities. (5) Understand associated costs/fees in the ceding fee (the charges so that your service provider can administer bookkeeping, year-end filing, investment consultation, etc. on your company's behalf.
Bonus Idea: Seek a service provider with a flat and transparent ceding fee; avoid excessive and complicated fees/charges to include
Tax Submission Fee
Claims Adjust Fee
Claims Processing Fee
Premium Tax (State)
Setting Up Your Micro-Captive
With Reinsurance Specialties, your 831(b) captive will be formed, domiciled and activated in three to four weeks. The Company Formation docs are simple and straightforward and should take no more than 10 minutes.
In five simple steps, you/your business will have adopted/enacted the 831(b) election and reap associated benefits.
To learn more about setting up a captive insurance company, contact us today. At Reinsurance Specialties™, we help businesses leaders mitigate business risks, adjudicate claims, protect assets and build wealth through tax-advantaged premium.