Superior wealth protection and risk management services including captive design and end of life tax free reorganization services

Employee Benefit Captive

Employee Benefit ("EB") captives are not technically a "type;" they are generally structured as reinsurance captives assuming some or all of the employee benefit program risks fronted by a commercial insurance company.

Large employers are increasingly self funding employee benefits. More turnkey solutions smaller companies can plug into are emerging, especially in the medical stop loss area (more on this below including our Managing Director's involvement with one of the first such group programs introduced in early 2013).

While EB captives are not really types of captives, we mentioned them in the Captive Types section of this website due to their importance and perception by many they are a type of captive as opposed to coverages any captive can address (of course domicile particulars vary and some do not have staff expertise to handle EB captive applications  yet).

Until recently, whether companies could create reinsurance captives to finance risk of employee life and health benefits has been a controversial topic due to disagreements over whether such an arrangement met the US IRS tax requirements for insurance. Few domiciles have any related experience as of 2014.

Main Elements Driving Interest in EB Captives:
  • reducing EB costs
  • improving EB program attributes 
  • natural extension of existing P&C captive programs
  • tax efficiency
  • new Health Insurance Tax (HIT) soon rising to 3% of health insurance premiums to impact more companies not applicable to self funded plans or stop loss captives
When structured correctly, EB stop loss captives, contrary to widespread belief, do not need prior approval by the US DOL under its EXPRO program. This program involves getting the consent of the Department of Labor over the arrangement due to ERISA rule impact.

There is wide range of uses for EB captives beyond reducing EB program costs or customizing program attributes. Using a captive to fund previously unfunded benefits can accelerate significant tax benefits. Using EB captives to reduce or control rise in employee benefit costs is the hot topic as of 2014. Unfortunately most "group" programs launched to date have limited history to prove they work as presented.

This is now definitively settled, at least with respect to VEBA structures, as of issuance of Revenue Ruling 2014-15 in May 2014 written by IRS associate general counsel Sheryl Plum. RR 2014-15 states the analysis of RR 2002-89 and RR 2005-40 were inapplicable due to the large group of covered individuals behind the captive reinsurance arrangement. Hopefully soon the IRS will go further and rescind the form over substance logic behind both RR 2005-40 and RR 2002-90 and some other of its findings.

Click here to read the full Revenue Ruling 2014-15 containing a solid analysis of applicable background and related tax law.

Click here to read a good marketing flyer on Employee Benefit Captives authored by Aon.

Contact us for more flyers, guides and other information on Employee Benefit captives. Be aware of anyone saying they have particular expertise or experience in this area as it as not as complicated as one might suggest.

As referenced above employee benefits ("EB") are really types of coverages, not types of captives, and overall expertise in captives suitable for your situation is of most importance when selecting who to work with and the best next steps indicated in the cost benefit analysis and designing the right program for you (which may involve integrating EB lines with other coverages in a pure, cell, series or some other hybrid captive structure solution, with or without advanced ownership design integration).

Note our managing director was involved with launching and introducing one of the first group employee benefits captive programs in the world (with a top 3 global insurance firm's alternative risk division), modeled somewhat off workers compensation group solutions. This EB captive area is a rapidly evolving, especially in the US now that the ACA dust is settling. There is great room for improvement, as change is the only constant.

Let us help guide you as we want to be a value added partner in some manner if your organization is forward thinking and entrepreneurial.

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