Proposed Legislation on Captive Insurance Companies Could Change the Game

By Anthony J. Cox, Esq.

Captive insurance companies (that is, insurance companies owned and controlled by its insureds to underwrite the risks of the parent and/or the parent’s affiliated companies) are an increasingly popular tool for small businesses to obtain insurance coverage for risks that may be too expensive or simply unavailable from traditional, outside insurance companies. One may be inclined to think that only large businesses would have the resources to establish a captive. In fact, businesses of all sizes have taken advantage of the benefits of captives. One of the ways captives are a viable option for small businesses is through Section 831(b) of the Internal Revenue Code, which provides certain tax breaks to qualifying businesses whose gross premium income does not exceed $1.2 million.

Section 831(b) was written in the mid-1980s, and many captive owners believe it’s high time for an increase in the $1.2 million ceiling. Fortunately for them, they may be about to get their wish. If signed into law, H.R. 34 (sponsored by Texas Congressman Kevin Brady) would raise the limit to $2.2 million.

This is not the only change offered by the legislation, however, and some captive owners may not benefit from these proposed changes. Such changes include modifications to the existing rules regarding risk distribution and the elimination of the “estate planning benefit” of small captives owned (directly or through attribution rules) by heirs of the business owner.

Any business which owns or is interested in owning a captive insurance company (along with lawyers, accountants, and others with captive insurance company clients) would be wise to monitor this proposed legislation, as it has the potential to change many longstanding rules of the captive game and, consequently, the practices of captive owners and their advisors.