Upcoming Changes to Section 831(b) Tax Code Legislation

The 2015 Appropriations Bill, passed by Congress in late 2015, updates the rules and requirements of small or mid market businesses electing the 831(b) tax code. The following major changes will take effect in 2017:

1. The current $1.2 million limit on gross premiums will increase to $2.2 million.

2. Companies seeking the 831(b) election are required to comply with new diversification requirements.

Compliance means passing one of two diversification tests:

Diversification Test #1

No more than 20% of premiums may be paid from any single policyholder.

"Policyholder" includes:

  1. Businesses paying premiums to the captive
  2. Businesses owned by the heirs of the business owner, business' owner's spouse or members of the same "control group" of companies

Single owner micro captives must have four separate risk pools to meet diversification standards—and they can't have the same owner.

Diversification Test #2

The business owner's heir or spouse cannot directly or indirectly own more than 2% than the interest they own in the insured business.

Let's Use an Example to Translate

Say Mom owns 50% of a business and Daughter owns 50%. To qualify for section 831(b), Daughter can only own up to 52% (50% + 2%) of the captive.

If Mom owns 100% of the business, Daughter may only own 2% of the captive.

You've got questions. We've got answers.
Contact Captive Insurance Brokers

The Point of the Diversification Requirement

831 b Election Tax Code Changes 2017

Changes to the 831(b) tax code take effect starting in 2017.

The new rules mitigates abuses of section 831(b) related to estate planning and the transfer of funds between family members.

Micro captives are absolutely not meant to be vehicles for wealth transfer. It's called captive insurance for a reason. Forming or joining a micro captive is for insurance purposes solely: pooling risk among a heterogeneous or homogeneous group and transfer risk among business partners you trust. 

Conclusions: Election Abuses & IRS Response

The U.S. Congress and IRS remain vigilant against companies abusing the 831(b) tax code. Some believe this batch of legislation doesn't do enough to punish captive companies who game the system, and only sets the precedent for the IRS to take a larger role in enforcing standards for micro captives.

Contact micro captive brokers at Alternative Risk Resources, LLC for explanation how new legislation affects your company.
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