Protecting Americans from Tax Hikes (PATH) Act of 2015

At the end of 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 became new law. The PATH Act was part of a large budget and tax deal that cleared Congress and was signed by President Obama just before year end 2015. Altogether, there were $622 billion in tax breaks in the massive bill.

A part of PATH is Section 333 which was introduced on December 10th and modifies several provisions of the tax code related to Section 831b captives (or small/micro captives). The most significant changes are:

  1. An increase in the limitation on premiums from $1.2 million to $2.2 million per year with the new limit indexed to increase with inflation.
  2. A new requirement when a spouse or lineal descendant (child, grandchild) of the business owner has an ownership interest in the captive (directly or through a trust). The new requirement provides that in order to qualify for the 831b election (1) the ownership of the spouse or lineal descendant must be the same as his/her ownership of the operating company (with some de minimis exceptions) or (2) no more than 20% of the net written premium of the captive can be attributable to any one policy holder (policyholder means all companies in a control group).
  3. These changes are effective starting in 2017.

The increase in the premium limit to $2.2 million creates an opportunity for current captive owners to evaluate their programs and see if there are additional risks that can be addressed by their captives. The increase will also make captives more appealing to larger companies that might not have found enough benefit with the $1.2 million limit.

The changes regarding ownership will require many of the captives that included estate planning to modify either their ownership structure or their insurance and reinsurance programs to fit within the new requirements. For most of our clients, these changes have no impact. For those clients that are impacted, we will work with our current clients to make sure that each of clients continues to comply with all federal and state tax and insurance laws and regulations.

Overall, Congress has reaffirmed the validity and usefulness of small captives and their role in protecting businesses. At River Oak Risk, we will continue to use our industry leading insurance, tax and legal expertise to help successful, sophisticated clients use captives to help their businesses.

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