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Captive Insurers in Delaware Offered Guidance for Complying with 831(b), PATH Act

Delaware Flag
October 19, 2016

The Delaware insurance commissioner has approved two "limited and streamlined" application procedures to make it easier for captive insurers to comply with the Protecting Americans from Tax Hikes (PATH) Act.

As explained in "Congress Amends Section 831(b)" in the February 2016 issue of Captive Insurance Company Reports (CICR), in December 2015, amendments to Section 831(b) of the Internal Revenue Code of 1986 were signed into law as part of the PATH Act of 2015.

"The Act increased the premium ceiling for the application of 831(b) from $1.2 million to $2.2 million for 2016 and indexed the premium ceiling for later years," the article, written by captive attorneys at Sutherland, Asbill & Brennan, says.

In addition to raising the premium ceiling, a key change to Section 831(b) in the Act focused on estate and gift tax evasion issues, the article explains. The Act added a new diversification requirement designed to prevent estate and gift tax abuse, says the article.

"To satisfy the diversification requirement, no one policyholder may pay more than 20 percent of a Section 831(b) company's annual net written premiums or, if greater, direct written premiums," the CICR article says.

"For purposes of applying the 20 percent limitation," authors P. Bruce Wright, M. Kristan Rizzolo, Saren Goldner, and Graham R. Green explain, "the Act applies attribution rules under which all policyholders that are related within the meaning of Sections 267(b) and 707(b), or are members of the same controlled group, are treated as a single policyholder."

Karen Weldin Stewart HeadshotKaren Weldin Stewart, Delaware insurance commissioner, suggests in the Delaware Department of Insurance "Captive Insurance Bulletin No. 6" that "many Delaware captive insurance company owners desire to retain the benefits of captive insurance, but are concerned that their captive insurer will not satisfy the new requirements of the PATH Act."

The bulletin goes on to provide guidance designed to make it easier for captive insurers to comply with the Act. Ms. Stewart commented in an October 17, 2016, Delaware Department of Insurance press release that this initiative "… affirms Delaware’s position by offering a timely and efficient regulatory option for captive insurance companies."

The Delaware "Captive Insurance Bulletin No. 6" spells out two possible compliance options, as follows.  

Procedure 1—Change Ownership Structure of Existing Captive

The first procedure relates to a change in ownership structure of an existing captive. For such ownership structure changes, the requesting captive must submit the following:

1. A revised business plan reflecting the new ownership structure;

2. Biographical affidavits for any new owners. Affidavits for existing owners are not required; and

3.  A written explanation as to how the new captive insurer complies with the applicable provisions of the PATH Act.

Procedure 2—Change Ownership by Forming a New Captive

If changing the ownership structure of the existing captive insurer is not feasible or desired, the second procedure is to relinquish the certificate of authority for the existing non-compliant captive and form a new captive with different ownership, which will require a new tax identification number and certificate of authority. In all respects other than ownership, the new captive must be identical to the old captive. For this procedure, the requesting captive insurer must submit the following:

1. A revised business plan reflecting the ownership change;

2. A notarized statement signed by the captive owner stating that the risks assumed by the new captive insurer are identical in terms of risk and premiums assumed;

3. Biographical affidavits for all new owners. Affidavits for existing owners are not required;

4. A written explanation as to how the new captive insurer complies with the applicable provisions of the PATH Act; and

5. Application Fee of $300.00. The $3,200 application processing fee is waived so long as the new captive insurer is the same as the former captive insurer in all respects including no changes in the business plan other than the ownership change in #1. Any submission received after December 1, 2016 will require the payment of both the $300 application and $3,200 processing fees.

Find the complete Delaware Department of Insurance press release, which contains a link to the bulletin, on Captive.com.

(Photo of Karen Weldin Stewart, above right, is courtesy of the Delaware Department of Insurance.)

 

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