The Self-Insurance Institute of America (SIIA), in collaboration with 15 state captive insurance associations, has requested guidance and clarification around the Protecting Americans from Tax Hikes (PATH) Act revisions to Section 831(b).
In a letter sent to the US Department of Treasury and the Internal Revenue Service (IRS), SIIA and the captive insurance associations requested guidance on the soon-to-be implemented changes, as well as protections until the guidance can be put into effect.
Among other changes, including raising the allowable premium threshold from $1.2 to $2.2 million, the PATH Act will introduce a new diversification requirement to Section 831(b), from 31 December 2016, which must be satisfied before an insurance company can elect to be taxed under Section 831(b).
The PATH Act provides two alternative ways an insurance company can satisfy the diversification requirement, namely a risk diversification test or ownership test, but the act failed to specify who the policyholder is in the context of reinsurance arrangements, according to the letter.
There is uncertainty around whether the first named insured is viewed as the policyholder or, if the IRS will consider the fronting carrier as the policyholder when the original policy is reinsured.
SIIA said in the letter: “The IRS should provide clear proposed guidance with respect to the definition of ‘policyholder’, clarifying that a look-through approach is to be used in a reinsurance arrangement. Look-through treatment is utilised elsewhere in the Internal Revenue Code (IRC) as well.”
It added: “The industry requests that the IRS at least temporarily allow look-through treatment for purposes of the risk diversification test until further proposed guidance can clarify this provision.”
The letter also outlined that there is a need for clarification around the ownership test. SIIA suggested that the IRS should provide guidance with respect to the treatment of the spouse as a specified holder.
In addition, SIIA requested a need for guidance on specified assets on a number of fronts.
“It is currently unclear whether, in a multiple insured entity situation, where the ownership of the spouse and/or a lineal descendant is not identical in all entities, the calculation should be based on gross revenue per entity, premiums paid per entity, fair market value, or some other method.”
“Guidance is similarly needed regarding how to value ‘interest’ when there is both common and preferred stock, or voting and non-voting stock, and various trust applications.”
SIIA’s letter argued that without clarification, “compliance with the ownership test cannot be determined with any degree of certainty”, meaning that it would not be efficiently audited by the IRS.
The letter suggested that because it is currently unclear how to achieve compliance, “clarification will foster compliance with the law, and more efficient auditing by the IRS”.
The letter concluded: “Administrative relief from compliance with the PATH Act’s amendments to 831(b) is not only appropriate but necessary to enable the industry to devise and implement efficient and effective procedures for compliance, and the IRS to efficiently audit.”
It added: “If neither guidance nor relief from compliance are available, then adopting the industry’s reasoned positions on a temporary basis would be a fair and reasonable method of enabling the Industry to comply with the letter and spirit of the new law.”
