Challenging IRS overreach on Section 831(b)
Will the US Congress be able to push back against the IRS on Section 831(b) regulations? Captive International investigates.
The finalisation of new regulations concerning Section 831(b) captive insurance companies has sparked significant concern within the industry, with many stakeholders viewing the rules as excessively punitive.
According to Maggi Lazarus (pictured), counsel at Barnes & Thornburg and representative of the MiniCap Coalition, the new regulations, published in the Federal Register on 14 January 2025, are expected to limit severely the participation of small and medium-sized businesses in the captive insurance space.
Lazarus, who specialises in government relations, has been at the forefront of efforts to challenge the regulatory changes. "The result of these new regulations will be to significantly chill participation in the 831(b) space by small businesses and medium-sized businesses across the country," she explained.
In response to the new regulations, industry advocates, including the MiniCap Coalition are encouraging Congress to employ a legislative strategy to overturn them using the Congressional Review Act (CRA). This federal statute allows Congress to disapprove of regulations issued late in a President’s final year in office. "The idea behind the CRA is that when an administration issues last-minute rules, they are often sloppily prepared and politically contentious. Congress should have the ability to review and potentially overturn them," Lazarus told Captive International.
If both chambers of Congress pass a Joint Resolution of Disapproval and the President signs it, the rule is effectively nullified, and the issuing agency is barred from reissuing a similar regulation unless explicitly authorised by Congress. "The CRA provides fast-track procedures to move the resolution through the Senate, which otherwise has a slower legislative process. And instead of requiring a 60-vote majority, the resolution can pass in that chamber with a simple majority," Lazarus noted.
However, strict deadlines must be met for the CRA to qualify for these special procedures. According to Lazarus, the key dates are the end of March for introduction in the Senate and mid-May for legislative action. "The Senate parliamentarian ultimately decides these deadlines, but by my estimation, these are the rough timelines we are working with," she stated.
Legislative strategy and industry advocacy
Representative Mark Green, Republican, Tennessee, has agreed to take the lead on this initiative in the House. "We expect the resolution to be introduced soon," Lazarus explained.
To build momentum, industry advocates are organising grassroots outreach efforts to encourage members of Congress to support the resolution. "We are mobilising captive insurance professionals, captive managers and anyone interested in preserving the availability of 831(b) captives," said Lazarus.
On the Senate side, no sponsor has been confirmed yet, but outreach efforts are ongoing. "We are urging Senate offices to consider introduction of a companion resolution, and I hope that someone will step forward in the coming weeks," she added.
Likelihood of success and political considerations
Historically, the Congressional Review Act has rarely been used successfully. Since its enactment in the mid-1990s, it has only overturned 20 regulations. However, Lazarus pointed out that 16 of these instances occurred in early 2017, when a Republican-controlled Congress aggressively used the CRA to nullify Obama-era regulations.
"Last year, Republicans indicated they want to make aggressive use of the CRA to overturn rules issued late in the Biden administration. This increases the likelihood that the new 831(b) regulations could be overturned," she noted. By contrast, the Biden administration only used the CRA twice to overturn Trump-era rules.
When asked about the potential response from the IRS, Lazarus admitted that it remains uncertain. "The individual nominated to be the next IRS Commissioner, Billy Long, has yet to begin confirmation proceedings in the Senate. So, at this point, we don’t have insight into how the IRS might approach this issue moving forward," she said.
The MiniCap Coalition also advocates a legislative approach; introducing a bill that establishes safe harbour provisions under Section 831(b). "This would provide clear guidance on what qualifies as insurance for federal income tax purposes. The goal is to give industry participants certainty that as long as they meet specific criteria, their transactions will be deemed compliant," Lazarus explained.
Lazarus strongly criticised the methodology behind the IRS’s regulatory approach, particularly the new loss ratio test. "The loss ratio figures set by the IRS are arbitrary and nonsensical for captive insurance. There is no real explanation of how they arrived at these numbers, except that they relied on industry data that includes large commercial insurers and focuses on medical insurance and personal lines of insurance that captive insurers cannot cover – making it an apples-to-oranges comparison," she said.
Another contentious element is the treatment of financing transactions. However, Lazarus pointed out that the Tax Court has previously ruled that such transactions can be valid under certain circumstances. "If a transaction is sometimes acceptable, it should not serve as the basis for classification as a listed transaction," she argued.
The IRS’s broader motives
Some industry participants believe the IRS is unfairly targeting small and medium-sized businesses that rely on captive insurance. "The IRS is not an expert in insurance. Rather than evaluating transactions on a case-by-case basis, they appear to prefer eliminating the availability of the benefit entirely," Lazarus stated.
One major problem is the IRS’s slow-moving audit and appeals process. "Many captive insurance companies have been in Tax Court for years, waiting for litigation to proceed. This puts pressure on small businesses, which may lack the resources for prolonged legal battles and instead choose to exit the captive space entirely," she explained.
The battle over Section 831(b) captive insurance regulations is shaping up to be a significant policy fight in Washington, with industry advocates mobilising to push back against what they view as overreach by the IRS. Whether through the Congressional Review Act or subsequent legislative action, stakeholders remain determined to ensure that small and medium-sized businesses can continue to use captives as a risk management tool without undue regulatory burden.
"It’s not a guaranteed win, but it’s a fight worth taking on," Lazarus concluded.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
