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6850 TPC Drive, McKinney, TX, 75070, Suite 108

Open Hours

9:00 A.M - 5:00 P.M CST

Insurance Program

Captive Insurance Program

In 2017 the $1.2 million premium limit will increase to $2.2 million and will be indexed to the Consumer Price Index. To make an 831(b) election, an insurance company must meet one of two substitute tests for each year in which it’s taxed under Section 831(b).

To meet the first test, a diversification test, no more than 20% of the insurance company’s premiums can come from any one policyholder. The broad classification of ‘policyholder’ relates the attribution rules of Sections 267(b) and 707(b) and a modified type of the controlled group rules of Section 1563(a).

If one policyholder is associated to another, those policyholders will be treated as one policyholder for this diversification test. The second test, a substitute to the first, principally necessitates that ownership of insured businesses and assets emulate (within a 2% de minimis margin) ownership of the insurance company.

Diversification Assessment

The ostensible anti-abuse objective of the diversification assessment is to warrant that small insurers with isolated policyholders are qualified to make the 831(b) election effortlessly, while forcing small insurers with related policyholders to meet an alternative test aimed at restricting estate planning exploitations.

It is vague whether the new diversification test also was directed at reinsurance pools. If the IRS applies the doctrines of Rev. Rul. 2009-26, the insurance company would stare through the reinsurance to the core insureds to conclude who a ‘policyholder’ is.

The statute and the Joint Committee on Taxation Technical Explanation do not report this issue. If the doctrines of Rev. Rul. 2009-26 apply, an insurance company directly insuring only one policyholder, from which it obtains no more than 20% of its premiums, could meet this prerequisite with one pool (encompassing many core insureds, none of which pay more than 20% of the premiums).

If those doctrines do not apply, that same insurance company may have to partake in at least four reinsurance pools, with no pool’s aggregate premium accounting for more than 20% of the insurance company’s premiums.

Ownership Assessment

The substitute assessment, an ownership assessment, is met (1) if no one who holds, directly or indirectly, an interest in the insurance company, directly or indirectly, is a significant other or lineal successor of somebody who holds, directly or indirectly, an interest in any insured business or asset; or

(2) where anybody who holds, directly or indirectly, an interest in the insurance company is a significant other or successor of anybody who holds direct or indirect interest in an insured business or assets, if each person’s proprietorship of the insurance company echoes (within a 2% margin) that person’s possession in the insured businesses and assets.