Adkisson's Captive Insurance Companies

In its most simple form, a captive insurance company is an insurance company owned by the parent that underwrites the insurance needs of the parent's operating subsidiaries.

Until 2001, the IRS repeatedly but unsuccessfully challenged captive insurance companies as subterfuges for non-deductible self-insurance within the business. After the IRS lost its $600+ million challenge against a captive owned by United Parcel Service in 2001, the Service resigned itself to the legitimacy of captive insurance companies and soon thereafter abandoned its economic family challenges to captives. The IRS has since issued a great deal of guidance to assist captive owners in their proper structuring, management and reporting.

Nearly all major corporations have captives -- indeed, it is hard to identify a major corporation that does not have at least one captive insurance company. Some corporations have multiple captives that serve different risks. For instance, a corporation may have one captive that primarily covers the corporation's general liability, environmental liability, and product liability risks, and then another captive that insures the employee benefit liabilities of the corporation, such as workers compensation and healthcare.

Examples of corporate captives:


Increasingly, non-profit organizations are also forming captive insurance companies to handle their insurance risks in-house. One example above is Veritas Insurance Corporation, a captive insurance company of the University of Michigan. Another is the National Catholic Risk Retention Group, Inc., a form of captive insurance company wholly owned by its member dioceses.

More than half of the states have now passed captive insurance enabling statutes, and more than a half-dozen of those states now aggressively cater to the domestic captive market. Captives are now being formed for medium-sized businesses that are able to pay as little as $500,000 per year in premiums to their captive.

Unfortunately, beginning in the late-2000s, certain small captive insurance companies which elect under Internal Revenue Code section 831(b), began to be mass-marketed as tax shelters, thus drawing the ire of Congress and the IRS, and so now greater care must be taken with so-called "831(b) captives" to ensure that they are indeed fully tax-compliant.


Recent Articles On Captives

2016.11.16 ... A Detailed Analysis of IRS Notice 2016-66 re 831(b) Captives

2016.11.13 ... Pretrial Memoranda Filed In Wilson 831(b) Captive Case Display IRS Attacks and Taxpayer Responses

2016.11.08 ... IRS Notice 2016-66 Regarding 831(b) Captive Insurance Companies Interpreted In Common English

2016.11.1 ... IRS Categorizes Certain 831(b) Captive Insurance Companies As A "Transaction Of Interest"

2016.10.15 ... 831(b) Small Captive Insurance Company Owners Face January 1 Deadline To Fix Ownership Structure

2016.9.29 ... Not All Captive Insurance Risk Pools Are Created Equally


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(c) 2016 Jay D. Adkisson. All rights reserved.