Sunday, April 21, 2024

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Captive USA 2024 Part II: More 831(b) captives to close, cells continue to prosper

  • Large unknows remain concerning IRS’ next move on 831(b) regulation
  • Service providers distancing themselves from 831(b) captives
  • At least 25% of new Marsh managed captives expected to be cells
  • New states could introduce cell legislation as captives become more mainstream

Further 831(b) captives in the United States are expected to shut down as a result of the proposed regulations from the Internal Revenue Service (IRS), while the popularity of cells is expected to grow further.

Captive Intelligence published part one of our USA trends long-read series last week, highlighting that companies seeking property coverage will continue to be the driving force behind captive formations in the United States in 2024.

The long-read also indicated that more companies will look to get the US Employee Retirement Income Security Act (ERISA) exemption from the Department of Labour (DoL).

Captive Intelligence reported in April that the IRS had proposed new regulations for micro captives, which have divided opinion across America’s captive landscape, with some saying they could destroy the industry, while others have branded it a “refreshing change”.

The IRS proposed regulations which would see certain 831(b) election captives deemed “listed transactions” and others labelled “transactions of interest”.

The majority of captives that record a loss ratio under 65% would be considered a “listed transaction”.

The 65% loss ratio threshold has been almost universally scorned. It is not uncommon for captives, whether taking the 831(b) tax election or not, and commercial insurers to perform at or better than that level.

Restructuring and getting out

“I think we’ll see more and more 831(b) captives closing down and more service providers that primarily work in the 831(b) promotion space drying up and shutting their doors,” Michael Serricchio, Americas consulting leader at Marsh Captive Solutions, told Captive Intelligence.

“We’ll also see those 831(b) captives either transform into an 831(a) or liquidate and then form a new cell or a new regular small captive.” 

Blake Kerr, partner and CFO at Helio, said the company has been helping firms restructure small captives or wind down some that are making the 831(b) election and looking at the best steps legally do so.

“We then take a ‘start fresh’ approach with a new captive, reapproaching the risk profile in a way that is less controversial for the IRS at this time,” he said.

Kerr said it is an “absolute fact” that national and super regional accounting firms and law firms are distancing themselves from anything related to 831(b) captives.

“The IRS has been very clever and put a heavy hand on any promotion of the 831(b) election, stating that companies cannot rely on professional advice of any firm the IRS deems a tax shelter promoter,” he said.

Kerr said he has had long, hard conversations with top IRS agents at the Large Business and International Division (LBI) around revoking the 831(b) election, which he said is time-consuming and expensive, if it can be done at all.

“The path of least resistance is: ‘We can leave the history of this 831(b) here, we can look to wind this up, let’s look at setting up a different corporation, reskin it and transfer some of the assets,’” he said.

“That’s where a lot of our clients have drawn comfort in that we have an actual roadmap to take them from 831(b) to 831(a).”


In December, Members of the House Ways and Means Committee sent a letter to the IRS Commissioner Daniel Werfel expressing their support for small captives.

The letter was praised by the 831(b) Institute which said the lack of guidance provided by the IRS to date on 831(b) plans is unfair and targets small business owners that are acting in “good faith” on the laws Congress has passed.

Nate Reznicek, president and principal consultant at Captive.Insure, and advisor to the Institute, told Captive Intelligence that the letter was largely the result of lobbying efforts from the 831(b) Institute.

“I think it is very good evidence that if there was smoke behind the Institute, there’s now certainly some fire there,” Reznicek said.

“We were not coming out of this just trying to have another marketing splash without any real meat behind it.”

The 831(b) Institute was launched in June and immediately asked for clarity from the IRS on how it regulates micro captives, arguing that it “unfairly” scrutinises them.

The Institute said it was formed to bring the business community together and give them a voice on what true risk mitigation and insurance coverage means to small and medium-sized businesses.

Reznicek said that historically it has been an easy decision for companies to take the 831(b) election.

“Now it is more of a nuanced question where they will question that even though they may meet all the requirements, they will have to consider whether it worth having additional scrutiny from the IRS on the captive structure, their business, and anything in general,” he explained.

Reznicek said some companies are assessing the situation, thinking about not taking any insurance company tax election and simply having their captive taxed as a standard corporation as to avoid 831(a) and 831(b) debate entirely.

“It is not as efficient from a tax perspective, but maybe it’s the most conservative approach and avoids ancillary risk in the transaction from a regulatory perspective,” he said.

Reznicek said that although he does not agree with the current IRS proposals around micro captives, he believes there is still the opportunity for fraud and abuse inside the captive space by bad actors, which must be addressed.

“There are still some changes that need to be done to get some of these other transactions that are not legitimate out of the industry, and the captive players that are doing things purely for tax motivated reasons.”

He said he hopes that the changes the IRS ultimately put in place will result from a more collaborative effort between the captive insurance industry and advisors at the IRS.

Reznicek said he is unsure when we are likely to get any further clarity from the IRS regarding the 831(b) situation.

“If you had asked me this question when we had the notice and comment period last year, I would have given you an answer that might have been a little cynical,” he said.

“I would have said the service is going to do what they have done before and come back with a rule change at the eleventh hour just before the calendar rolls over and cause more panic in order to have everybody shut down.

“Now we’re sitting here on 24 January, we have a full calendar year ahead of us, and I have no idea what they are going to do or not do, or if they are going to come back with additional changes after hearing what we provided as an industry during the notice and comment period.”

He added the industry is now left guessing as to whether the changes are going to be scrapped entirely or if the IRS is going to start all over.

“Or if they are just going to completely ignore everything and do whatever the heck they want,” Reznicek said.


Outside of the 831(b) debate, the use of cells is expected to continue booming in the US in 2024 as companies of all sizes look to utilise the benefits of captives during the hard market.

Elizabeth Steinman, managing director of risk finance & captive consulting for the Americas at Aon, told Captive Intelligence they formed a large number of cell captives last year, primarily to cover property for companies with large real estate exposures. 

“The cell structure enabled these companies to bifurcate the risk, for example geographically or by line of business,” she said.

Serricchio said that in 2022, one in four of Marsh’s new formations were cells. The final 2023 figures are not yet available.

“I think that at least 20 to 25% of our new captives will be cells, and they will be in places like Bermuda, Washington, DC, Delaware, Isle of Man, Malta, and places like that,” he said.

“It is cheap, simple, easy, flexible, and almost like a ‘sign and drive’ type of situation or a ‘rent to own’ situation where a client can dip their toe in the water and get into a cell and there’s zero downside.”

Jesse Olsen, chief operating officer at Helio, said that although he is not see seeing as much interest in cells as others, he still believes they are prominent in the US market.

“Probably more so now than they have been in quite some time, perhaps in the history of captives,” he said.

“It just so happens those coming to Helio are prioritising full control of their programme and selection of their vendors over speed to market and having the preset service providers that come with a cell facility.”

Olsen’s expectation is that come the second half of this year, there will be a further increase in the number of cell formations.

“This is a gross generalisation, but towards the end of the calendar year or near industrywide renewal dates, cells are more popular due to speed-to-market,” he said.

Marsh Captive Solutions launched its latest cell offering, ReadyCell, earlier this month and hope that it will further lower the barrier to entry for America’s middle market.

Serricchio added that cells are popular because everything that can be done in a single parent captive can also be done in a cell structure.

“If the client liked the cell going forward, they could keep it or they could transition out of it and grow it into a single parent captive,” he explained.

It is not out the question that more US states could look to introduce cell legislation this year if there is demand.

“I think there might be because there are a lot of states that still do not have cell legislation,” said Anne-Marie Towle, CEO of global risk and captive solutions at Hylant.

“As we look into 2024 and 2025, they’ll probably be some changes if it’s a domicile that truly wants to compete with the Vermont, Tennessee, Utah, Hawaii, and DC, for example.”

Serricchio said he would love to see domiciles such as Pennsylvania, Minnesota and Washington DC introduce captive legislation because it would give Marsh clients and organisations more “optionality” and the ability for more companies to have cells in their home state.

As the US captive market has matured, we no longer anticipate multiple new domiciles each year. Instead, existing domiciles are looking at how they can enhance their captive legislation, which could include cell regulation.

“Existing domiciles are starting to tweak their laws to meet their unique requirements rather than replicate regulations from other states,” said Prabal Lakhanpal, senior vice president at Spring Consulting, told Captive Intelligence

“With folks looking at excess and surplus lines tax in individual states becoming more of a trend, it is reasonable that captive domiciles will continue to evolve and likely to expand and have more focus on creating cell legislation.”