Captive insurance companies are not just risk funding vehicles for large corporations. They may be the right solution for individuals and small businesses as well.If the captive is structured and managed correctly, the captive may also qualify to elect 831(b) captive status, which states that the underwriting profit of the captive is tax free if the premiums paid to the captive are below $2.2 million. The only tax applies to investment return less non-claim expenses. Here is a typical structure that allows for risk transfer and risk distribution.
In thinking about creating an 831(b) captive, here are a few things you should consider:
- Any captive could make the 831(b) election provided it has less than $2.2 million of premiums, but it is not right for all captives
- Critical Issues to consider:
- The extent that the family members own the entities for spread of risk
- Long-tail versus short-tail nature of risk
- Frequency and severity of losses
- Loss history and expected future results
- Typically the ideal coverage for an 831(b) captive is
- Low frequency and high severity coverage types
- Not available in the commercial market or very expensive
- 831(b) is a tax election available to insurance companies only. If the captive does not meet the requirements to be an insurance company the election cannot be made, or must be reversed
- A real business purpose must exist for the establishment of the captive, with a true insurance risk
- Expenses are deductible up to the investment income received in tax year
Spring’s award-winning captive team is well versed in 831(b) captive regulation and has years of experience in establishing these types of captives. We can assist you through the entire process from feasibility study through approval and then management and review. Contact us for more information about our 831(b) solutions.