26 June 2023Analysis

Oklahoma comments submitted to IRS

The Oklahoma Insurance Department has submitted comments to the Internal Revenue Service (IRS) regarding the Notice of Proposed Rulemaking (NPR) that the IRS is considering for microcaptives.

The OID said that it opposes the NPR for the reason that captive insurance transactions, which insure low frequency but high severity risks, will be needlessly designated listed transactions or transactions of interest. Low frequency risks will very likely fail the 65% loss ratio test applied to the captive insurer’s most recent nine taxable years. Legitimate insurance coverages like terrorism or pandemic risks thankfully have few claims meaning they are low frequency.

However, when claims occur, they are severe in dollar amounts. Captive insurers that insure such risks for legitimate risk management reasons, should not be burdened with the administrative and legal expenses associated with being in the category of tax evasion or avoidance by failing the loss ratio test.

The OID also opposes the financial factor with a related party that does not produce taxable income for the receiver of the funds within the last 5 tax years and the NPR’s 65% loss ratio. It says that both conflict with the Oklahoma Captive Insurance Company Act in the Oklahoma Insurance Code because the IRS, by regulating the business of insurance, is engaging in the business of insurance. The McCarran-Ferguson Act (MFA) preempts the IRS from doing so.

The OID said that Insurance Commissioner Glen Mulready has proposed that the IRS withdraw the NPR and engage with state captive insurance regulators and the industry to find agreeable solutions to the IRS’ reasons for issuing the NPR.

“Such a joint effort satisfies the mandates of Executive Order 13132 and is a preferred solution to the IRS’ concerns as opposed to the adoption of the NPR,” said the OID. “EO 13132 mandates the IRS to seek meaningful and timely input from local and state officials in the development of federal policies having federalism implications. The NPR’s federalism implication is that it directly affects how the Insurance Commissioner will regulate captive insurers when applying the OCICA. Insurance Commissioner Mulready is willing and ready to engage with the IRS to find agreeable solutions to the IRS’ concerns with captive insurance.”