The Self-Insurance Institute of America (SIIA) has submitted its comments in response to the Internal Revenue Service’s latest proposed rules for captives making the 831(b) tax election.
Captive Intelligence reported in April the IRS had proposed new regulations for “micro captives” at the same time as obsoleting Notice 2016-66, having had it struck down by the courts in March 2022.
Proposed Rule 109309-22 has prompted extensive debate across America’s captive industry with it threatening to label a wide range of 831(b) captives “listed transactions” or “transactions of interest”.
The deadline for submitting comments in response to the proposed rule was 12 June, with a public hearing scheduled for 19 July.
SIIA has engaged with the IRS on the topic of micro captives since 2014 and has now published its submitted comments, saying the proposals will “severely limit access to captive insurance programs for small- and medium-sized businesses in the US”.
In a release accompanying the circulated comments, Ryan Work, SIIA senior vice president of government relations, said the IRS is seeking to “over-regulate certain § 831(b)-electing captives by creating untenable loss ratio requirements (65%), loan back limitations, and 10-year retroactive provisions”.
The 65% loss ratio calculation and limit, outlined in the IRS’ proposed rule, has particularly caught the attention of many across the US captive market since 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.
In the submitted comments, SIIA writes on the issue: “Treating electing captives differently than other captives or commercial insurance companies is arbitrary and capricious, where similar loan-backs or less than 65% loss ratios exist.
“This discrimination and singling-out of a federally-enacted statute is not only wrong, but lacks an understanding of how the insurance market and risk mitigation works. The IRS cannot pick and choose criteria among different groups within a larger captive insurance marketplace.”
In SIIA’s accompanying release, Work emphasised that the rule was trying to “legislate through regulatory action”, contrary to congressional intent and would “prevent middle market American companies from mitigating against critical and evolving legitimate business risk”.
“None of the four criteria identified by the IRS in the proposed regulations are abusive, either separately or in their own right, nor should they be used under the proposed criteria to label a transaction as a listed transaction or transaction of interest unless they are always tax avoidance,” he added.
Work repeated SIIA and other’s previous calls for the IRS to develop and issue criteria for industry to follow that is in line with the existing 831(b) law, arguing that the Service has access to documents concerning thousands of captives that complied with data requests.
“Treating § 831(b)-electing captives differently than other larger captives or commercial insurance companies is harmful and an over-reach,” he said.
“For these reasons, SIIA continues to recommend that the IRS engage with the captive insurance industry and business owners to more appropriately craft regulations that combat abuse, while further understanding the intent, the need, and the appropriateness of risk mitigation.”