831(b) Institute Urges Repeal of IRS Rule on Micro-Captives

The 831(b) Institute and more than two dozen organizations representing small businesses, insurers, banks, and taxpayer advocacy groups have submitted a joint letter to the US Department of the Treasury and the Internal Revenue Service (IRS), calling for the repeal of a final rule targeting micro-captive insurance arrangements.

Set to take effect July 31, 2025, the regulation categorizes many small captive insurance structures as "listed transactions" or "transactions of interest," triggering increased compliance obligations, potential legal exposure, and possible criminal penalties. The rule was finalized in January 2025.

Captive insurance companies electing tax treatment under Section 831(b) of the Internal Revenue Code typically insure or reinsure risks for related entities. Under the new rule, the classification of these captives depends largely on two factors: their loss ratio over a 10-year period and whether they engage in related-party financing. Captives with loss ratios below 60 percent may be treated as transactions of interest, and those below 30 percent—when combined with related-party financing—can be classified as listed transactions, which carry stricter reporting and disclosure requirements.

The final regulations replace the earlier reporting framework developed under IRS Notice 2016–66, which was vacated by a federal court in 2022 for violating the Administrative Procedure Act. The updated rule imposes mandatory reporting for all parties involved in such transactions, including the captive insurer, insured entities, and material tax advisers, with penalties for noncompliance.

Dustin Carlson, president of the 831(b) Institute, said, "The IRS's final rule threatens to dismantle a critical tool used by small businesses to manage risk when commercial insurance is insufficient, unavailable, or unaffordable."

The coalition argues that the regulation imposes new ownership diversification and loss ratio requirements not supported by statutory authority or industry data. It also contends that the rule shares legal deficiencies with IRS Notice 2016–66, which was previously vacated by a federal court for violating the Administrative Procedure Act.

In the letter, the organizations claim the new rule contradicts reforms under the Protecting Americans from Tax Hikes (PATH) Act of 2015, which recognized the use of 831(b) captives and restricted the IRS from unilaterally limiting them.

Pete Sepp, president of the National Taxpayers Union, said, "The final rule on micro-captives issued earlier this year violates [our] principles and creates policy precedents that could harm taxpayers in many situations."

Michael Adelman, CEO of the Ohio Bankers League, said, "These rules ignore the fact that low claims frequency doesn't mean an arrangement is abusive. Instead, it may just mean the risk didn't materialize. Punishing banks for developing strong risk controls and not suffering losses undermines legitimate risk management and threatens access to insurance coverages our members can't get anywhere else."

According to the letter, small captive insurers serve as a risk management tool for small and mid-sized businesses, offering protection against rising premiums, shrinking coverage options, and emerging risks such as cyberattacks and natural disasters. The signatories argue that the rule reflects a broader pattern of regulatory overreach.

The 831(b) Institute stated its willingness to collaborate with the IRS on narrowly tailored reforms but said the final rule must be repealed before its implementation date to prevent disruption to legitimate small business operations.