There are many times when businesses join associations or trade groups and receive modest benefit for their dues paid. Then there are times when an association provides tremendous value for the dues it receives. The Self-Insurance Institute of America (SIIA) clearly falls into the latter of the above scenarios. They continue to deliver 1) wonderfully clear thinking, 2) strong leadership, and 3) advocacy on behalf of their members and the industry they represent.
On June 15, SIIA submitted comments to The Honorable Steven T. Mnuchin, Secretary of the U.S. Department of the Treasury regarding the unnecessary regulatory burden imposed on small Captive Insurance Companies (CICs) by IRS Notice 2016-66. SIIA provided its comments in response to Executive Order 13789 – Identifying & Reducing Tax Regulatory Burdens (“EO”). The letter stated, “SIIA and its members respectfully request that the Secretary of the Treasury and Director of the Office of Management & Budget identify Internal Revenue Service (“IRS”) Notice 2016-66 (as amended by IRS Notice 2017-08) (the “Notice”) as both a “significant tax regulation” and one that satisfies the standards under §2(a) of the EO to be included in the report generated by the Secretary.”
IRS Notice 2016-66 requires most small captive insurance companies (making an 831(b) tax election) to file form 8886. It also requires filings by CIC owners and advisors. The Notice also labels most small captive insurance companies as a “Transaction of Interest” despite longstanding Congressional support for small CICs (Congress created 831(b) in 1986 and recently raised the premium limits for an 831(b) election from $1.2 million to $2.2 million in the 2015 PATH Act).
SIIA is a member-based association dedicated to protecting and promoting the business interests of companies involved in the self-insurance and alternative risk transfer industry, both domestically and internationally. SIIA’s membership includes captive insurance managers (who represent thousands of businesses) and captive industry experts, risk retention groups, third party administrators, excess/stop-loss/reinsurance carriers, and self-insured employers.
CLICK HERE to learn more about SIIA.
SIIA surveyed its members following their compliance with 2016-66. According to SIIA, “This data supports SIIA’s comments and conclusions… the burdens that we anticipated…unfortunately we were correct.”
In its letter to the Treasury Department, SIIA points out that 2016-66 and its corresponding regulatory burden should be eliminated for the following reasons:
(1) It is Overbroad
(2) It creates Duplicate Reporting
(3) It Creates Significant Financial Costs in Money and Time for Duplicate Reporting
(4) It creates Ongoing Reporting Obligation
(5) It Creates Uncertainty Regarding Compliance
(6) It is Grossly Premature (as Tax Court Cases that Will Provide Guidance are Pending)
SIIA outlined data demonstrating Notice imposes an undue financial burden and creates undue complexity for small and medium sized businesses. All the effort has provided little, if any, benefit to the IRS. However, the Notice requirements have come at a tremendous cost to many taxpayers.
Number of CICs Surveyed
Total Number of Forms Filed
Total Cost of Compliance
Average Cost per Captive
Total Hours of Compliance
Average Hours per Captive
As a solution, SIIA proposed revoking Notice 2016-66 and simply modifying the Federal Tax Return all insurance companies file (1120-PC) to include any additional information the Service requires.
According to SIIA:
Notice 2016-66 should be revoked for any future filings. The first wave of filings was completed by May 1, 2017. The IRS now has thousands of filings to review and should be able to glean any information it needs from those. An ongoing filing obligation is not necessary. If the IRS feels that the information it receives regarding a captive’s annual tax return is not sufficient or not organized in the manner it wishes, there is a less burdensome approach to collect this information. The captive’s annual tax return on Form 1120-PC should be modified to ask for the information that the IRS wishes to receive. This tax form already has Schedule B which is dedicated for the filers electing the §831(b) election. Reorganizing this section or expanding it would be an efficient, low cost way for the captive insurance industry to report. While we recognize that modifying a tax return is not an easy task for the IRS, in light of the burden this is causing to the industry, this seems like a reasonable and appropriate solution. Incidentally, it will also save IRS time and resources to have everything organized in one comprehensive filing.
CIC Services opinion: Hats off to SIIA – This is certainly a more reasonable approach than creating multiple filings that waste time and money (and smell a lot more like harassment than legitimate efforts to collect information to understand the industry). Harassing businesses wastes time and money, causes fear and trepidation, hampers focus on growth and chills hiring and job creation.
Finally, it is worth noting that one of the footnotes in SIIA’s letter provides one of the best and most succinct descriptions of small captives that I have seen. I’m sharing it as a great conclusion to this article.
A captive insurance company, or captive, is typically an insurance company that has a common owner with the business being insured. The captive is given a limited purpose license to sell insurance only to a related party, controlled group or controlled unaffiliated businesses. Approximately 80% of all Fortune 500 businesses have their own captive insurance company and will be taxed under IRC §831(a). Often, a captive provides these large businesses with significant tax benefits and places them at a competitive advantage because they can better buffer the unexpected catastrophic losses that occur. Small and middle market businesses typically elect for their captive the tax benefits designed for small insurance companies under IRC §831(b), in the same way that small and mid-size businesses typically elect S-corporation status. The §831(b) election exempts the insurance company’s underwriting profits from C-corporation taxation, while leaving its investment income subject to double taxation. There are downsides to the election, including that a net operating loss on the insurance business cannot reduce taxable investment income and cannot be carried to another year, either backward or forward.