HR 1625 has provided much-needed guidance for taxpayers with micro captives, primarily clarifying parts of the Protecting Americans from Tax Hikes (PATH) Act 2015, according to John Dies and Matthew Spradling from alliantgroup.
Signed into law by US President Donald Trump on 23 March, HR 1625, the Consolidated Appropriations Act 2018, provided clarifications on the section 831(b) diversification requirements which were implemented in the PATH Act.
The PATH Act enacted two diversification tests, the 20 percent test and the ownership test, in order to address the potential abuse of micro captives.
To qualify as a micro captive under section 831(b), the taxpayer must meet at least one of these tests.
Previously, in the 20 percent test the definition of a policyholder was unclear, creating confusion in relation to risk management pools.
HR 1625 has amended the definition of a policyholder meaning that the pool itself is not a policyholder, but each discrete insured paying premiums into the pool is a policyholder.
Dies and Spradling said that this common sense change is anticipated to have a positive impact on the captive industry.
A similar confusion was amended for the ownership test, with the definition of a specified holder being clarified and a new aggregation rule being applied.
Additionally, the ownership test was modified to look at the “relevant specified assets” of the captive as opposed to looking at the specified assets.
These changes are a move in the right direction, but according to Dies and Spradling, they have not resolved all the uncertainties surrounding the PATH act tests and further guidance is still desperately needed.
Subscribe now to Captive Insurance Times to read Dies and Spradling’s full breakdown of HR 1625 and its impact on the section 831(b) diversification requirements implemented in the PATH act in the next issue.