If you’ll recall, in the previous article we discussed taxation code 831(b) as one of the various IRS codes that can be formed under captive insurance. In this article, we’re going to talk about code 831(b) in the same manner. Much of the implications of 831(b) are the same as 831(a) but with a few caveats. So, hang in there because most of the general information is the same, but it bears repeating — especially if you haven’t read the previous article.
To recap, a captive insurance company is either a direct C-corporation or a business entity that is taxed as a C-corporation. Its purpose is to allow business owners to become an insurance company of their own with the capacity to write property and casualty insurance to smaller groups of insureds — or actuarial partners. A “C-corporation” will have one or more subsidiaries that set up the captive insurance company which in turn can group those subsidiaries as one entity. Under this structure, the captive insurance company aka business owner, operates as a licensed insurer. As a licensed insurer, they must identify and evaluate their own policies and underwrite their own premiums. From there, the subsidiaries pay the deductible tax premium payments set by the captive insurance owner or actuarial partners. In turn, they invest those premium payouts into future claim payouts. In summation, this gives the business owner more control over his or her taxation with a captive insurance company.
As previously mentioned, there are various codes in which captive insurance companies can be formed. The one we’re discussing in this article is the 831(b) captive insurance, aka “micro” or “mini” captive insurance company. Captive insurance companies are defined by the size of their premium and the taxation of the actual insurance company. The 831(b) captive insurance companies work for businesses that take in less than $2.8 million (2024) of premiums each year. Once classified as an 831(b) captive insurance company, the business owner will only be taxed on their investment income and not their premium income. Due to their C-corporation status, they are taxed at ordinary tax rates and not the standard rates for traditional tax gains.
Another caveat for micro captive insurance companies is that they must designate and qualify for 831(b) status each year. To qualify, they must receive less than $2.8 million in premiums each year, excluding the first $2.8 million or more in premiums that they receive. If the business owner (or, captive insurance company) does not meet the designated requirement, premiums may still be deducted by the parent company and paid to the captive insurance company. This is enabled because you can have multiple single-parent captive insurance companies that qualify as 831(b) captive insurance, and a parent company along with its subsidiaries with the capacity to create multiple captive insurance companies under the 831(b) taxation code. This scenario would involve the captive exceeding their $2.8 million in total premiums.
When it comes down to the 831(a) vs 831(b) codes, it’s a means of risk management that works well for the captive who does not consistently exceed the $2.8 million mark. A captive insurance company that consistently exceeds this limitation — and by a lot — will not qualify for the 831(b) taxation code. Any attempt to do so would be breaking captive insurance law.
There are several benefits associated with being a micro captive insurance company and they’re all the same as the financial benefits of 831(a) regular captive insurance companies:
Of course, under the 831(b) micro captive insurance, the capacity to create multiple captive insurance companies to mitigate an exceeded premium limit adds an extra benefit as the captive insurance company will get to maintain their 832(b) status while also taking advantage of favorable tax rates and cash flow.
The ultimate goal of entering into a captive insurance program or becoming a captive insurance business entity is to provide protection for your organization’s bottom line. It’s not to avoid paying taxes or claims. Unfortunately, this taxation system has become used and abused resulting in heavy audits, tax evasion, and fraud. That’s why companies and business owners alike are thinking about becoming a captive insurance entity should work with experienced professionals who understand captive insurance best practices as well as risk management concepts. It’s the only way to avoid scrutiny from the IRS and to protect yourself, your company, and your employees. To learn more about captive insurance and how it’s structured, check back with us for the next article on captive insurance.
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