PATH Act may create tumultuous 2017 for small captives


The Protecting Americans from Tax Hikes (PATH) Act, which came into effect on January 1, 2017, has the potential to shake up the small captives 831(b) sector, as it tries to adapt to the new legislation, according to senior executives interviewed by Captive International.

Captive International asked a number of captive executives for their opinions on what will be some of the more prominent issues facing the industry in 2017.

The small captives sector was cited as being one of the big talking points in 2016, which will continue well into 2017, with the introduction of the PATH Act.

The PATH Act makes amendments to section 831(b) of the Internal Revenue Code, which may affect how captive insurance companies are treated in terms of tax.

Firstly, it has raised the maximum annual premium limitation from $1.2 million to $2.2 million, with a provision for inflation adjustment in the following years.

It also has introduced two diversification requirements, which an insurance company must meet in order to qualify as an 831(b) captive.

One test is that no more than 20 percent of net written premium of a company is attributable to any one policyholder.

“Much of the attention in 2016 has centred on major changes in the small captives/831(b) sector,” said Dennis Harwick, president of Captive Insurance Companies Association.

“The legislation that eventually emerged (the PATH Act), raised more questions than it answered and has set the stage for a tumultuous 2017 as owners of small captives and their managers try to understand the legislation and develop ways to comply, despite the lack of clarification from the IRS.”

David Kirkup, chief financial officer and chief operating officer of Captive Alternatives, added: “The PATH Act increases maximum premium limits to $2.2 million, which we take as a vote of confidence by Congress in the captive movement.

“The 2016-66 disclosure notice is designed to identify poorly designed captive programmes that fail to meet the guidelines set out by various safe harbour rules. This may well help to reduce competition, and to highlight those programmes, such as CapAlt’s, that operate strictly in accordance with those rules.”

In total senior executives from Willis Towers Watson, Marsh Captive Solutions, the Federation of European Risk Management Solutions, the Captive Insurance Companies Association and Captive Alternatives participated in the examination of 2016 and their outlook for 2017. To read the full transcript of their thoughts and comments, please click here.

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Captives, PATH Act, Small Captives, North America, CICA, Dennis Harwick, David Kirkup, Captive Alternatives

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