Although the past 24 months have seen intense industry discussions, §831(b) captives, or micro-captives, have been around for decades. Risk management-motivated companies use these small insurers to efficiently insure various risk exposures that exhibit reasonably high claim severities, yet are incurred unpredictably. Most of these risks are either within the company’s retentions, self-insured, or assumed because commercial coverage is lacking or expensive.

However, as with many tax-advantaged situations, captive insurers formed under IRC §831(b) haven’t always had risk management as their primary goals. Wealth and estate planners have created lucrative tax avoidance models that cast a huge spotlight on captives. Since 2003, the IRS has increased its scrutiny of anyone who forms and operates a captive under the small insurer election under §831(b). But much has happened over 14 years and it can be confusing.

Learning Objectives:

Define, compare, and contrast micro-captives against their larger traditional single-parent captives
Explain the relevant U.S. federal tax law
Outline the IRS’ position
Discuss recent developments, including Protecting Americans Against Tax Hikes (PATH) Act of 2015, recent pronouncements and initiatives from the IRS, and soon-to-be adjudicated court cases
Discuss how such captives can serve as an effective risk management tool while operating with sound business purposes

Charlie Woodman

Willis Towers Watson

Appearances