IRS-Delaware micro-captives case could set worrying precedent: CICA panel

09-03-2022

IRS-Delaware micro-captives case could set worrying precedent: CICA panel

The Internal Revenue Service’s (IRS) move to force the Delaware Department of Insurance to hand over information related to a number of micro-captives represents a worrying development for the industry, if it sets the precedent of the federal government, as opposed to state governments, taking a stance on insurance regulation.

That was one of the themes that emerged in a panel discussion called ‘Hot Topics in Captive Insurance’, which took place at the Captive Insurance Companies Association’s (CICA) annual conference, taking place in Tucson this week (March 6-8).

The panel of experienced industry veterans comprised: Joel Chansky, Consulting Actuary, Milliman; Nancy Gray, Regional Managing Director, Americas, Aon; Dave Provost, Deputy Commissioner, Captive Insurance, Vermont Department of Financial Regulation; and Paul Shimomoto, Partner, Goodsill Anderson Quinn & Stifel, who also moderated the session.

The group had an interactive discussion on current hot topics impacting the captive insurance industry. They examined current developments in captive regulation, discussed new trends and other key issues facing the industry. They also discussed what is driving the increased interest in captives and threats facing the industry.

In terms of the IRS case, Shimomoto noted that, while the case was still going through the courts, it appeared the move was part of the IRS’s wider strategy of targeting micro captives, also known as 831(b)s, which remain on the IRS’s so-called ‘dirty dozen’ list of tax scams. Delaware has a number of micro captives registered there.

“It is an interesting case one two levels. It challenges the confidentiality rules that states use, which is the basis of Delaware’s defence, and perhaps shows that there can be exceptions to that when it comes to the IRS. But it also highlights another issue. The McCarran–Ferguson Act has successfully exempted insurance from federal regulation, leaving it in the control of the states. On that basis, it makes this a very interesting argument – it is a novel case that still being litigated.”

Chansky also highlighted a different regulatory concern that came to the fore last year. The State of Washington, which does not have legislation to allow captives to operate, passed a bill that forces companies based there, which own captives elsewhere, to pay a number of taxes on their captives.

These include a registration fee of $2500, a 2% premium tax and a 10-year lookback clause forcing companies to pay these taxes retrospectively. While he acknowledged the move could have been worse for the industry, many companies will get around the bill’s intention by simply removing Washington risks from their captive.

He suggested that the state thought the bill could generate as much as $30 million in past premium taxes; in fact, the amount has been much lower. Meanwhile, Shimomoto suggested that the 10-year lookback also raises the spectre of legal challenges to the bill.

Delaware Department of Insurance, Aon, Vermont, IRS, CICA Annual Conference 2022, Captive, Insurance, Reinsurance, Dave Provost, North America

Captive International