TAKING THE FRUSTRATION OUT OF WORKERS' COMPENSATION!
831(b) CAPTIVES - A UNIQUE WAY OF FINANCING RISKS
TURNING PREMIUMS INTO PROFITS
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How does your business face your "uninsurable" risks? Do you even know what they are?
Over 90 percent of Fortune 1000 companies and many successful middle market businesses have 831(b) Enterprise Risk Captives. The name 831(b) Captive comes from the actual US tax code provision that was enacted as part of the 1986 Tax Reform Act enacted by Congress and signed by President Ronald Reagan into law during his 2nd term – U.S. Code, Title 26, Subtitle A, Chapter 1, Subchapter L, Part II, section 831, subsection (b), of the United States Internal Revenue Code, titled “Alternative tax for certain small companies.”
Theses 831(b) Captives, are also referred to as "Micro-Captives", “Mini-Captives” or “Enterprise Risk Captives”, and are used by profitable, cash flow positive mid-size companies looking for cost-effective ways to finance and transfer risk that the traditional insurance marketplace cannot "insure". When properly structured, there are numerous benefits of owning an 831(b) Captive including possible financial, estate and tax advantages, such as:
From the benefits above, you can see why the use of an 831(b) Captive is one of the most popular choices for middle market companies to help manage their risks. However, there are limitations to the captive: the captive will have maximum annual premium limitation of $2,200,000; and the captive cannot directly pay a third party, it can only reimburse the insured business for covered losses that occur. Because of these limitations, it is predominantly used to insure risks that no traditional insurance company will cover, or to fill holes in an existing traditional insurance program.
There are innumerable other kinds of exposure and risks that your business faces in your daily work activity that you may, or may not, recognize as being a threat to your success and perhaps your future existence. Various other types of risks include, but are certainly not limited to the following:
The types of exposure noted above truly only “scratch the surface” of what a business may protect from loss through the use of an 831(b) Captive. You may also think of numerous other risks that are not typically insurable, or perhaps not affordable, through the commercial markets. One way to identify risks that are not being traditionally insured by you is to open your liability and property insurance policies and read what is describe as not being covered (such as paved surfaces, bridges, or underground property) or specifically excluded (such as your product, your work, or intentional acts of an employee). Most of those exposures may be insured non-traditionally with an alternative market approach such as an 831(b) captive.
There have been IRS and court challenges to the 831(b) captive product, but if the rules and regulations are followed, the captives have prevailed in most cases. The two most critical issues that an 831(b) Captive insurance programs will face scrutiny of are Risk Transfer and Risk Distribution.
Now, after reading all of this, you might be thinking that the federal government does not like 831(b) captives, that is not the case. In fact, congress passed the 2015 Appropriations Bill under the Obama Administration that actually increase the maximum allowable premium for an 831(b) Captive from $1,200,000 to $2,200,000. The Federal Government clearly understands the need for and benefits of a properly structure 831(b) Captive, they are simply trying to keep the use of these from being abused.
INTRODUCTION TO CAPTIVES
BENEFITS OF GROUP CAPTIVES
TYPES OF CAPTIVES
IS A CAPTIVE RIGHT FOR ME?
HOW TO JOIN A CAPTIVE
HEALTH INSURANCE CAPTIVES
TURNING PREMIUMS INTO PROFITS BOOK