On March 23rd of this year President Trump signed into law the HR 1625, the Consolidated Appropriations Act of 2018.
In summary the law does:
- Increased the maximum annual premium limitation for section 831 – B Captives from $1.2M to $2.2 and provided for inflation adjustment increases for future years.
- It implemented additional requirements to address abuse of captives:
- the 20% test
- the Ownership test
To qualify as an 831 – B Captive the entity must meet at least one of the new tests.
The 20% test:
States that no more than 20% of the annual net written premiums of the captive insurance company may be attributable to one policyholder.
This means that the pool itself is not considered the policyholder, but rather each insured paying premiums into the pool is a policyholder. Therefore, as long as none of the insureds in this example account for more than 20% of the total premiums paid to the captive, the 20% test would be met.
The Ownership test:
Captives failing the 20% test may still qualify for 831(b) treatment if the entity meets the requirements of the Ownership test. The Ownership test was devised as a way to prevent captives from being utilized as estate planning vehicles. Originally, a captive would fail this test if a “specified holder” (spouse or lineal descendant) owned an interest in the captive that is greater than two percent of that individual’s ownership interest in “specified assets” (interest in the insured) of the captive. In layman’s terms, a captive would fail the ownership test if a spouse or lineal descendant of an owner/shareholder of an insured business, owned a greater share of the captive than they owned in the business.
HR 1625 clarifies the spousal issue by eliminating spouses from the definition of specified holder, unless they are not a US citizen. Therefore, under the new rules, the Ownership test now only applies to lineal descendants of either spouse, spouses that are not US citizens, and spouses of lineal descendants. The new rule excludes assets that have been transferred to a spouse or other relation passed “by bequest, devise, or inheritance from a decedent during the taxable year of the insurance company or the preceding taxable year”.