Captive Insurance Company Arrangements – New Disclosure Reporting Requirement
Articles by: Richey May, Dec 19, 2016
Captive Insurance Company Arrangements – New Disclosure Reporting Requirement – Due 1/30/2017
Penalties for Failure to Report by Deadline: Minimum $10,000 and Maximum $50,000
The IRS issued Notice 2016-66 on 11/1/2016 regarding small/micro captive insurance companies (i.e. Section 831(b) captives).
The IRS has defined “Transactions of Interest” that they require to be reported if the taxpayer has had a captive insurance relationship that meets certain criteria at any time after November 2, 2006 (i.e. – a 10 year period with any captive insurance arrangements). For most companies that either own a captive insurance subsidiary or do business with a related party captive insurance company, this reporting is highly likely to be required. In summary, the company acquiring insurance from a related captive insurance company as well as the captive itself will be required to report these insurance arrangements if one or both of the following apply:
- the amount of the liabilities incurred by Captive for insured losses and claim administration expenses during the Computation Period (defined in section 2.02 of the notice) is less than 70 percent of the following:
- premiums earned by Captive during the Computation Period, less
- policyholder dividends paid by Captive during the Computation Period; OR
- Captive has at any time during the Computation Period directly or indirectly made available as financing or otherwise conveyed or agreed to make available or convey to A, Insured, or a person related (within the meaning of § 267(b) or 707(b)) to A or Insured (collectively, the “Recipient”) in a transaction that did not result in taxable income or gain to Recipient, any portion of the payments under the Contract, such as through a guarantee, a loan, or other transfer of Captive’s capital.
Note: Item 2 may apply simply by a related captive insurance company guaranteeing the company’s debt.
A significant amount of information is required and must be reported using IRS Form 8886. We strongly recommend that any of our clients impacted by this new disclosure requirement contact their captive manager/provider and work together to comply with these rules and ensure consistent reporting by the company and its related captive insurance company. Our tax professionals are also available to assist you in preparing and submitting the disclosure by the January 30, 2017 deadline. Please let us know if we can assist you with this or any of your other tax consulting or compliance needs.