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CAPTIVE INSURANCE PROGRAM
In 2017, the $1.2-million premium limit rose to $2.2 million and was linked 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, diversification test, no more than 20 percent of the insurance company’s premiums can come from any one policyholder.
The broad classification of “policyholder” relates to 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 with another, those policyholders will be treated as one policyholder for this diversification test.
The second test can substitute for the first. It primarily requires that ownership of insured businesses and assets match ownership of the insurance company (within a 2 percent margin).