13 June 2023Analysis

SIIA submits comments to IRS over microcaptives

The Self-Insurance Institute of America (SIIA) has submitted formal comments in response to proposed regulations issued by the Internal Revenue Service (IRS) that severely limit access to captive insurance programs for small and medium-sized businesses in the US.

According to the SIIA IRS Proposed Rule 109309–22 seeks to over-regulate certain § 831(b)-electing captives by creating untenable loss ratio requirements (65%), loan back limitations, and 10-year retroactive provisions. These actions not only propose to legislate through regulatory action, contrary to congressional intent, but would prevent middle-market American companies from mitigating against critical and evolving legitimate business risk. It is especially onerous that the IRS is seeking to create a 10-year retroactive period in changes to law and regulatory authority, which is both unprecedented in scope and creates an arbitrary and capricious burden on US businesses.

The IRS set a deadline of June 12 for interested parties to send in comments about the proposed rule.

“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,” said SIIA in a statement.

Rather, SIIA said that it strongly believes that the IRS should create criteria that track existing law and authority, not circumvent that law or ignore Congressional intent in an arbitrary and capricious retroactive manner. Importantly, § 831(b) has been, and continues to be, a valid tax election available to insurance companies that qualify and make the election.

Since enactment in 1986, § 831(b) has served a critical policy purpose to help small- and medium-sized businesses mitigate risks not available, or too expensive, in the commercial insurance market. Since that time, Congress has clearly intended for § 831(b) to streamline and assist businesses in mitigating against risk that includes farmers, auto dealers, community banks, manufacturers, truckers, construction firms, professional services firms, and many others.

Beginning in 2014, SIIA has engaged the IRS in good faith and advocated for a balanced approach in combating abusive behaviour, while also allowing appropriate access to captive insurance as the statute provides. Since that time, Congress has clarified § 831(b) access twice, while the IRS has failed to issue needed guidance, SIIA claims.

SIIA continues to assert that the IRS should create appropriate criteria, based on the thousands of captives who have complied with data requests, and that tracks existing law and authority. Treating § 831(b)-electing captives differently than other larger captives or commercial insurance companies is harmful and an over-reach.

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.