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EnterpriseRiskCaptives:Regulatory&LegislativeUpdate
DCIA2017SpringForum
RyanWork,VicePresident,GovernmentRelationsSelf-InsuranceInstituteofAmerica,Inc.
2016Presidential– BytheNumbersü 5xElectoralCollegewinnerlostthe
popularvoteü 14xWinnerreceivedlessthan50%LowerTurnout• Poolofeligiblevotersrose5.5%/#ballotsincreased1.5%
• Majorpartyvotesfell3million- 3rd party=5.5%/7.5millionvotes
2012vs.2016• Trumpreceived317,00moreballotsthanRomney
• Clintonreceived3.5millionfewerthanObama(3.4%)
SmallFactorsWon:
• Clintonwon3%lessthanObama
• Trumpwon10%ofObamasupport
• Trumpwonwhitefemalesby10points,53to43.
• TrumpwonlargerAfricanAmerican(8%)andHispanicvote(29%)thanRomney
Framing thePoliticalEnvironmentPresident:306R– 232D(270towin)• AntiWashingtonFrustration• Post-IdeologicalHouse:239R– 193D(218Majority)• 246Republicans- 188DemocratsSenate:52R– 48D(+2)• Republicansdefended24seats,comparedwithonly10forDemocrats
• OutpolledPresidential– Toomey,Rubio
States:
• Governors– 33R- 16Ds
• Rs Control33StateLegislatures,17vetoproof
2016– BattlegroundStates2012
2016ElectionMap2012
PolicyPerspectives
RegulatoryViewofCaptives
AbusiveTaxShelters– IRS‘DirtyDozen’List• ‘Unscrupulouspromoterspersuadecloselyheldentitiestoparticipateinscheme…creatingand“selling”totheentitiesoftentimespoorlydrafted“insurance”bindersandpoliciestocoverordinarybusinessrisksoresoteric,implausiblerisksforexorbitant“premiums,”whilemaintainingtheireconomicalcommercialcoveragewithtraditionalinsurers.’
• ‘Promotersmanagetheentities’captiveinsurancecompaniesyearafteryearforheftyfees,assistingtaxpayersunsophisticatedininsurancetocontinuethecharade.’
ERCLegislativeEnvironment
CongressionalProposals• FarmMutuals:IncreasewrittenpremiumthresholdofIRC§ 831(b)from$1.2millionto$2.2.Million
831(b)LegislativePurpose
•Prohibituseofreinsurance• Limitto20%ofnetwrittenpremiumstoapolicyholderinataxableyear
SenateFinanceCommitteeOriginal
Restrictions
• Senate•Thresholdincrease/curbestateabuse
•U.S.Treasurystudyontheuseofcaptivesasanestateplanningtool
•House• Cleanthresholdincrease
IntroducedafterSIIAAdvocacy
Congressional– LawChangesIncorporatedin2015PATHAct
I.Premiumthresholdincreasefrom$1.2millionto$2.2million(indexedtoinflation).
II.Restrictionstoprohibitestateplanningandwealthtransfer.
üTest1:RiskDiversificationNomorethan20%ofnetwrittenordirectpremiumsfromanyonepolicyholder.
• RelatedinsuredsaretreatedasonepolicyholderOR
üTest2:OwnershipTestFamilyandlinealdescendantscannotownmoreintheinsurancecompanythantheoperatingentity.
• 2%deminimis
EffectiveDate:Dec.31,2016
WhereWeStandwithChanges
SIIA,joinedby15stateassociations,requestedthefollowingfromtheIRS/Treasury:
• AdministrativerelieffromcompliancewiththePATHAct
• InterimReasonableCompliance/SafeHarbors
• Guidance&Clarificationonkeyissues:• Defining“policyholder”• Clarificationofspecifiedandspousalownership• Calculationofspecifiedassetsrelatedtomultiplebusinessentities• Deminimis standardapplicationandexceptions.
PATHAct:SIIALegislativeClarificationProposals
JCTDiscussions&TaxTechnicalCorrections:
vTest1:Clarificationoflook-throughlanguage
vTest2:Calculationofthe“percentageofinterestsinthespecifiedassets”
vGuidancetoTreasurythatdeminimis standard(2%)cannotbelowered- providebrightlineexceptionsforsituationswherenoestatetaxavoidanceisinvolved
vSpousalOwnershipIntent
TaxTechnicalCorrectionsAct
1)Clarifylook-thoughforreinsuranceorfrontingarrangements2)Clarifyspecifiedassets( underTest2)tomeanaggregateamountofrelatedassetsownedbyspouse/relation.• Two-yeargraceperiodwhenacquiringownershipthroughinheritanceordeath.
JCTleavesuptoTreasuryDepartmentguidancerelatedtoownership,premiums,grossrevenue,andfactorstakenintoaccountunderapplicableStatelawforassessingrisk.
Captives&TaxReform
TaxReformReconciliationRoundTwo:ØCreateaseparate,lowerbusinesstaxrate
Ø Trump-15%Ø House- 20%
ØCuttaxesonsavingsandinvestmentbyallowingdeductionof50percentofthedividends,capitalgains,andinterestreceivedfromstocksandmutualfunds.
Ø Provideatax-freereturnonnewinvestmentbyallowingfullandimmediatewrite-offs.
ØEliminateDeathTaxØ Individualtaxdownto3brackets– 10/25/35
Ø Eliminatealldeductionswiththeexceptionofchild,home,charitableØ Doublestandarddeductions
Questions:qTreatmentof831(b)Captives
IRSNotice2016-66
17
Notice2016-66OverviewNovember1,2016• IRSissuesNotice2016-66designatingvastmajorityof831(b)
captivesas“TransactionsofInterest”• Triggersdisclosurerequirementsforowners,managersandmaterial
advisors.• Failuretoreportcanincurfinancialpenalties.
January30,2017• OriginalFilingDate• PostponementtoMay1(Notice2017-08)
18
IRSConcernsIsthecaptiveaninsurancecompany?Ø Inadequatecapitaltocoverassumedrisks.Ø LoansfromcaptivetoinsuredsoraffiliatesØ InsurednotfilingclaimsforlossesØ PooledpremiumsdonotreflecttheriskØ AmbiguousclaimsproceduresØ IssuanceofpoliciesandbindersØ CaptiveclaimsadministrationØ Investmentssolelybenefittingtheinsured
19
TransactionofInterestRequirements•Form8886FilingRequirements:• 831(b)Captivesinwhichtheinsuredcompanyowner(andaffiliates)ownatleast20%ofthecaptiveAND:
1.Thecaptives’lossesandlossexpensesarelessthan70%ofpremiumsearnedlesspolicyholderdividends,or
2.Captivehasmadeloans,guarantees,etc.benefitingaffiliates.
20
Form8886Filed,NowWhat?
• TheIRSwillreviewfilingsandtrytodistinguishbetweenabusiveandnon-abusivestructures.• IRSwilldeterminewhethercertain831(b)captiveswillbe:• DeletedfromTOIcategory;• DesignatedasListedTransactions;or• FurtherReview.
IRSNotice:ExecutiveOrderApril21– ‘IdentifyingandReducingTaxRegulatoryBurdens’§ TreasurytoreviewsignificanttaxregulationsissuedonorafterJanuary1,2016.
§ OfficeofInformationandRegulatoryAffairsandOMBidentifyinaninterimreportwithin60daysregulationsthat:
(i)imposeunduefinancialburdenontaxpayers;(ii)addunduecomplexitytotheFederaltaxlaws;or(iii)exceedthestatutoryauthorityoftheIRS.
üFinalreportdue150daysaftertheorder.üActionswillbepublishedintheFederalRegisternolaterthan180afterfinalreport.
SIIAAdvocacyMessages• ERCtaxpayerswillbeplacedunderundueregulatoryandreportingburdens.• Noticebroadlytargetedformajorityofparticipants,insteadofbeingnarrowlytailoredtowardsabusers.• MuchoftheinforequestedbytheIRSisalreadyprovidedtothemthroughvariousrequiredforms.• IRSisignoringrecentTaxCourtprecedent• PrematuretoissuesuchaNoticeconsideringtheimplicationsofcases– ie.Avrahami.• IRSisignoringCongressionalintent- PATHACT
SIIAActivitiesüMetwithIRS
üFormallyRequestExtensionforCompliance(GranteduntilMay1).
üExpressedConcerns
üEducate&MeetwithCongresstowardsgoalofIRSrescission.üCongressionalLettersüIndustryLetters
üFiledCommentsinJanuary.üInformingEOReport
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