Tax Victory Buoys Captives

December 29, 2008 – Business Insurance

It isn’t often that the captive insurance industry scores a victory of the Internal Revenue Service, but in 2008 it did just that.

That victory came in February, when the IRS withdrew a proposed 2007 rule affecting sponsors that use captives to fund risks of various corporate entities and that file a consolidated tax return covering the affiliates and the captive.

The rule would have barred captives from taking an immediate tax deduction at the time reserves were established. Instead, tax deductions would have been allowed only at the time claims are paid – a change that wold have made captive programs much less attractive financially, especially for captives used to write long-tail business.

Editor’s Note: Employers are beginning to realize that funding a health benefit program through a captive makes sense for some. Those employers utilizing existing captives for other lines may be wise to consider the scheme. Auto dealers have used captives successfully for years on their credit life business, for example. Large retail chains such as furniture outlets have done so as well. A large national TPA is marketing a product utilizing a Rent-A-Captive scheme for employer groups of 50-250 employee lives.

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