U.S. Tax Update
“He said, She said”
Speakers
• Richard E. Irvine, Partner, PricewaterhouseCoopers
Bermuda
• P. Bruce Wright, Partner, Dewey LeBoeuf LLP
New York
U.S. Tax Update Agenda
• TECHNICAL DEVELOPMENTS
– PROPOSED CELL REGULATIONS
– DODD FRANK – PREMIUM TAX CHANGES
– IRS NOTICE 2011-2
• “HE SAID, SHE SAID”
– MEDICAL STOP LOSS
– LOANBACKS
– ECONOMIC SUBSTANCE
Proposed
Cell
Regulations
PROPOSED CELL
REGS
• GENERAL RULES
– REGS EXPLICITLY STATE THEY DO NOT
ADDRESS THE PROPER TAX
CHARACTERIZATION OR FILING REQUIREMENTS
OF THE CORE
– IF A CELL IS CLASSIFIED AS A SEPARATE
CORPORATE ENTITY, THEN IT WILL BE TREATED
LIKE ANY OTHER CORPORATION, INCLUDING
THE ABILITY TO MAKE STAND ALONE TAX
ELECTIONS
– REGS WILL NOT OVERRIDE GENERAL TAX LAW
PRINCIPLES – FOR EXAMPLE, IF A CELL HAS NO
BUSINESS PURPOSE OTHER THAN TAX
AVOIDANCE, IT STILL WILL BE DISREGARDED AS
A “SHAM”
CELL REGS
ProposedPROPOSED
Cell Regulations
• GENERAL RULES
– REGS INDICATE THAT OWNERSHIP OF A CELL
WILL BE DETERMINED TO BE WHOMEVER
“BEARS THE ECONOMIC BURDENS AND
BENEFITS OF OWNERSHIP” OF THE CELL
• SHARES VERSUS CONTRACT RIGHT
– EFFECTIVE DATE – ISSUANCE OF FINAL
REGULATIONS
• IMMEDIATE IMPACT POSSIBLITY
– OVERRIDES WITH NOTICE 2008-19
» 1 YEAR GRACE PERIOD
Proposed Cell Regulations
• DOMESTIC CELL CAPTIVES
– EVERY CELL WILL BE TREATED AS A SEPARATE
TAXPAYER, EXCEPT FOR SEGREGATED ASSET
ACCOUNTS OF A LIFE INSURANCE COMPANY
– THE FACT THAT STATE LAW DOES NOT
CONSIDER THE CELL TO BE A SEPARATE
ENTITY IS NOT IMPORTANT
– REGS CITE VERMONT AND SOUTH CAROLINA
CELL CAPTIVE PROVISIONS, BUT THIS SAME
RULE SHOULD APPLY TO CELL CAPTIVES
FORMED IN ALL OTHER DOMESTIC DOMICILES
WITH SIMILAR LAWS, INCLUDING THE DISTRICT
OF COLUMBIA
Proposed Cell Regulations
• DOMESTIC CELL CAPTIVES
– THE CELL'S SEPARATE ENTITY STATUS WILL BE
RESPECTED EVEN IF THE CELL FAILS TO
COMPLY WITH STATUTORY RECORD KEEPING
REQUIREMENTS NEGATING THE LIMITATION OF
LIABILITY
– THE CELL'S SEPARATE ENTITY STATUS WILL BE
RESPECTED EVEN IF, THROUGH AN
ARRANGEMENT SUCH AS GUARANTEES, THE
DEBTS AND LIABILITIES OF A CELL ARE
ENFORCEABLE AGAINST ASSETS OF ANOTHER
CELL
Proposed PROPOSED
Cell Regulations
CELL REGS
• FOREIGN CELL CAPTIVES
– REGS STATE THEY DO NOT ADDRESS THE PROPER TAX
CHARACTERIZATION OR FILING REQUIREMENTS OF A
FOREIGN CELL COMPANY OR ITS CELLS
– BUT AN IMPORTANT EXCEPTION EXISTS FOR A FOREIGN
CELL THAT CONDUCTS AN INSURANCE BUSINESS
– IF THE FOREIGN CELL’S BUSINESS WOULD QUALIFY IT AS
AN INSURANCE COMPANY FOR FEDERAL TAX PURPOSES
HAD IT BEEN A DOMESTIC ENTITY, THEN IT WILL BE A
STAND ALONE FOREIGN CORPORATION
• MORE THAN HALF OF THE BUSINESS OF THE CELL IS INSURANCE
– REGS CITE GUERNSEY, CAYMAN AND BERMUDA CELL
CAPTIVE PROVISIONS, BUT THE SAME RULE SHOULD
APPLY TO OTHER OFFSHORE DOMICILES WITH SIMILAR
LAWS
Proposed PROPOSED
Cell Regulations
CELL REGS
• EXAMPLE – FOREIGN INSURANCE CELL
– ASSUME FOREIGN CELLCO ESTABLISHES CELL A
FOR A U.S. TAXPAYER
– ASSUME MORE THAN HALF OF CELL A'S
BUSINESS IS ISSUING INSURANCE OR
REINSURANCE CONTRACTS
– UNDER THE REGS, CELL A WILL BE TREATED AS A
SEPARATE TAXPAYER
– BECAUSE CELL A QUALIFIES AS AN INSURANCE
COMPANY, IT WILL BE CLASSIFIED AS A FOREIGN
CORPORATION
Proposed PROPOSED
Cell Regulations
CELL REGS
• EXAMPLE – FOREIGN INSURANCE CELL
– CELL A’S U.S. OWNER MAY HAVE TO REPORT
SUBPART F INCOME – INSURANCE INCOME USING
INSURANCE TAX ACCOUNTING BECAUSE U.S.
OWNER BEARS THE BURDENS & BENEFITS OF
CELL OWNERSHIP
• SUBPART F APPLIES TO A CONTROLLED FOREIGN
CORPORATION (“CFC”)
– GENERAL CFC – U.S. SHAREHOLDER DEFINITION
» U.S. SHAREHOLDER = ≥10% VOTING SHARES, OR
– RELATED PERSON INSURANCE INCOME (“RPII CFC”) – U.S.
SHAREHOLDER DEFINTION = “ANY” SHARES
Proposed PROPOSED
Cell Regulations
CELL REGS
• EXAMPLE – FOREIGN INSURANCE CELL
– CELL A ALSO WILL BE ELIGIBLE TO MAKE TAX
ELECTIONS, INCLUDING UNDER IRC §953(D) AND
§831(B), ON A STAND ALONE BASIS
PROPOSED
CELL REGS
Proposed
Cell Regulations
• EXAMPLE – FOREIGN NON-INSURANCE CELL
– ASSUME FOREIGN CELLCO ESTABLISHES CELL B
FOR A U.S. TAXPAYER
– ASSUME LESS THAN HALF OF CELL B'S BUSINESS
IS ISSUING INSURANCE OR REINSURANCE
CONTRACTS
– REGS STATE THAT THEY DON’T ADDRESS CELL
B’S TAX STATUS DUE TO THE "NOVEL FEDERAL
INCOME TAX ISSUES" RAISED
– SO PRESUMABLY CELL B, IF ASSOCIATED WITH A
NON-CFC CELL CAPTIVE, OWNER OF CELL B WILL
REPORT ONLY INVESTMENT INCOME WHEN
REPATRIATED
Proposed PROPOSED
Cell Regulations
CELL REGS
• EXAMPLE – FOREIGN NON-INSURANCE CELL
– CELL B WILL NOT BE ELIGIBLE TO MAKE TAX
ELECTIONS, INCLUDING UNDER IRC §953(D) AND
§831(B), ON A STAND ALONE BASIS
– POSSIBLE PASSIVE FOREIGN INVESTMENT
COMPANY ISSUES
• IF OTHER CELL’S WHICH HAVE CONDUCTED AN
“INSURANCE BUSINESS” ARE NOT FACTORED
IN DETERMINING THE STATUS OF CELL B,
THEN CELL B COULD BE A PFIC
Proposed PROPOSED
Cell Regulations
CELL REGS
• TRANSITIONAL RULES
– CELLS (DOMESTIC OR FOREIGN) ESTABLISHED
PRIOR TO SEPTEMBER 14, 2010 MAY BE ELIGIBLE
TO BE TREATED, TOGETHER WITH THE CORE, AS
A SINGLE ENTITY
– DOMESTIC CELLS ARE ELIGIBLE IF:
• THE CELL CONDUCTED BUSINESS OR INVESTMENT
ACTIVITY
• NO OWNER OF A CELL TREATED THE CELL AS A
SEPARATE ENTITY
• THE CELL AND THE CORE HAD A REASONABLE BASIS
FOR ITS CLAIMED CLASSIFICATION
Proposed PROPOSED
Cell Regulations
CELL REGS
• TRANSITIONAL RULES
– DOMESTIC CELLS ARE ELIGIBLE IF:
• NEITHER THE CELL NOR ANY OWNER NOR THE CORE
WAS NOTIFIED BEFORE SEPTEMBER 14, 2010 THAT
THE CLASSIFICATION OF THE CELL WAS UNDER
EXAMINATION
– THIS EXCEPTION CEASES TO APPLY IF THERE IS
A CHANGE IN OWNERSHIP OF 50% OR MORE OF
THE INTERESTS IN THE CORE (OR THE CELL)
PROPOSED
CELL REGS
Proposed
Cell Regulations
• TRANSITIONAL RULES
– FOREIGN CELLS ARE ELIGIBLE IF:
• MORE THAN 50% OF THE BUSINESS OF THE CELL WAS
INSURANCE BUSINESS
• THE CELL’S CLASSIFICATION WAS RELEVANT
(GENERALLY, AFFECTS THE LIABILITY OF ANY PERSON
FOR FEDERAL TAX OR INFORMATION PURPOSES) AND
MORE THAN HALF OF ITS BUSINESS WAS INSURANCE
BUSINESS
• NO OWNER OF THE CELL TREATED THE CELL AS A
SEPARATE ENTITY
• THE CELL AND THE CORE HAD A REASONABLE BASIS
FOR ITS CLAIMED CLASSIFICATION
• NEITHER THE CELL NOR ANY OWNER NOR THE CORE
WAS NOTIFIED BEFORE SEPTEMBER 14, 2010 THAT THE
CLASSIFICATION OF THE CELL WAS UNDER
EXAMINATION
Proposed PROPOSED
Cell Regulations
CELL REGS
• TRANSITIONAL RULES
– THIS EXCEPTION CEASES TO APPLY IF THERE IS A CHANGE
IN OWNERSHIP OF 50% OR MORE OF THE INTERESTS IN THE
CORE (OR THE CELL)
Proposed Cell Regulations
• NEW CELL ANNUAL REPORTING REQUIREMENT
– EACH CELL COMPANY AND EACH CELL WITHIN IT WILL
ANNUALLY FILE A STATEMENT WITH THE IRS
CONTAINING IDENTIFYING INFORMATION "TO ENSURE
THE PROPER ASSESSMENT AND COLLECTION OF
TAX”
– THE STATEMENT WOULD BE A STAND-ALONE FILING
DUE MARCH 15 OF EACH YEAR
– THE IRS SOUGHT TAXPAYER WRITTEN COMMENTS
BY 12/13/10 ON THIS STATEMENT REQUIREMENT AND
SEVERAL OTHER ISSUES, INCLUDING:
• WHETHER A CELL IS A SEPARATE ENTITY IF IT HAS NO
ASSETS OR CONDUCTS NO ACTIVITIES
• WHETHER A SERIES WITH NO MEMBERS SHOULD
STILL BE TREATED AS A SEPARATE ENTITY
– IRS STILL REQUESTING COMMENTS
Proposed Cell Regulations
• POTENTIAL IMPACT
– EFFECT OF CONVERSION OF A CELL TO A
“SEPARATE ENTITY” FOR U.S. TAX PURPOSES
• DEEMED LIQUIDATION/CONTRIBUTION
• TAX FREE SPIN OFF
• DEEMED NOVATION/FET CONSEQUENCES
– APPLICATION OF CFC/RPII CFC RULES TO EXISTING
CELLS PREVIOUSLY UNREPORTED CELLS HELD BY
U.S. PERSONS
• FORM 5471
– APPLICATION OF PFIC RULES TO NON INSURANCE
CELLS
Premium tax
• NON-ADMITED AND REINSURANCE
REFORM ACT OF 2010 ("NRRA")
– EFFECTIVE DATE JULY 21, 2011
– NO STATE OTHER THAN HOME STATE OF AN
INSURED MAY REQUIRE ANY PREMIUM TAX
PAYMENT FOR NON-ADMITTED INSURANCE.
§ 521
• NON-ADMITTED INSURANCE MEANS ANY
PROPERTY AND CASUALTY INSURANCE
PERMITTED TO BE PLACED DIRECTLY OR
THOUGH A SURPLUS LINES BROKER WITH A NONADMITTED INSURER ELIGIBLE TO ACCEPT SUCH
INSURANCE. § 527(9)
Premium Tax
• NRRA – DEFINITIONS
– PREMIUM TAX MEANS, WITH RESPECT TO
SURPLUS LINES OR INDEPENDENTLY
PROCURED INSURANCE COVERAGE, ANY TAX,
FEE, ASSESSMENT, OR OTHER CHARGE
IMPOSED BY A GOVERNMENT ENTITY DIRECTLY
OR INDIRECTLY BASED ON ANY PAYMENT MADE
AS CONSIDERATION FOR AN INSURANCE
CONTRACT FOR SUCH INSURANCE, INCLUDING
PREMIUM DEPOSITS, ASSESSMENTS,
REGISTRATION FEES, AND ANY OTHER
COMPENSATION GIVEN IN CONSIDERATION FOR
A CONTRACT OF INSURANCE. § 527(12)
Premium Tax
• NRRA – DEFINITIONS
– INDEPENDENTLY PROCURED INSURANCE MEANS
INSURANCE PROCURED DIRECTLY BY AN
INSURED FROM A NON-ADMITTED INSURER. §
527(7)
Premium Tax
• NRRA – DEFINITION OF HOME STATE
– HOME STATE MEANS WITH RESPECT TO AN
INSURED:
• THE STATE IN WHICH AN INSURED MAINTAINS ITS
PRINCIPAL PLACE OF BUSINESS OR, IN THE CASE
OF AN INDIVIDUAL, THE INDIVIDUAL'S PRIMARY
RESIDENCE; OR
Premium Tax
• NRRA – DEFINITION OF HOME STATE
– IF 100 PERCENT OF THE INSURED RISK IS LOCATED OUT
OF THE STATE REFERRED TO IN CLAUSE (I), THE STATE
TO WHICH THE GREATEST PERCENTAGE OF THE
INSURED'S TAXABLE PREMIUM FOR THAT INSURANCE
CONTRACT IS ALLOCATED, PROVIDED, HOWEVER, IF
MORE THAN 1 INSURED FROM AN AFFILIATED GROUP ARE
NAMED INSUREDS ON A SINGLE NON-ADMITTED
INSURANCE CONTRACT, THE TERM "HOME STATE" MEANS
THE HOME STATES, AS DETERMINED PURSUANT TO
SUBPARAGRAPH (A), OF THE MEMBER OF THE AFFILIATED
GROUP THAT HAS THE LARGEST PERCENTAGE OF
PREMIUM ATTRIBUTED TO IT UNDER SUCH INSURANCE
CONTRACT. § 527(6)
Premium Tax
• ALLOCATION
– A STATE COMPACT MAY BE ENTERED INTO, OR
STATES MAY OTHERWISE ESTABLISH
PROCEDURES TO ALLOCATE AMONG THE STATES
THE PREMIUM TAXES PAID TO AN INSURED'S
HOME STATE. § 521(b)(1)
Premium Tax
• ALLOCATION
– TO FACILITATE THE PAYMENT OF PREMIUM TAXES
AMONG THE STATES, AN INSURED'S HOME STATE MAY
REQUIRE SURPLUS LINES BROKERS AND INSUREDS WHO
HAVE INDEPENDENTLY PROCURED INSURANCE TO
ANNUALLY FILE TAX ALLOCATION REPORTS WITH THE
INSURED'S HOME STATE DETAILING THE PORTION OF
THE NON-ADMITTED INSURANCE POLICY PREMIUM OR
PREMIUMS ATTRIBUTABLE TO PROPERTIES, RISKS OR
EXPOSURES LOCATED IN EACH STATE. THE FILING OF A
NON-ADMITTED INSURANCE TAX ALLOCATION REPORT
AND THE PAYMENT OF TAX MAY BE MADE BY A PERSON
AUTHORIZED BY THE INSURED TO ACT AS ITS AGENT. §
521(c)
Surplus Lines Insurance
Insurance Multistate Compact (SLIMPACT)
• SUPPORTED BY NCOIL AND SOME INDUSTRY
GROUPS
• WOULD ESTABLISH A COMMISSION (MADE
UP OF STATE REGULATORS AND STAMPING
OFFICES) TO ESTABLISH A TAX ALLOCATION
FORMULA AND UNIFORM TAX PAYMENT
FORMS AND PROCEDURES, AND ALSO
RESOLVE DISPUTES OVER CHOICE OF HOME
STATE (SO, NO ALLOCATION FORMULA YET);
PROVIDES FOR A CLEARINGHOUSE
Surplus Lines Insurance
Insurance Multistate Compact (SLIMPACT)
• NEED 10 STATES OR STATES ACCOUNTING
FOR 40% OF THE SURPLUS LINES MARKET
TO BECOME EFFECTIVE
• UNCLEAR IF IT WILL BECOME EFFECTIVE,
AND IF IT DOES IT WILL BE LESS THAN ALL 50
STATES
Non-admitted
Insurance
NONADMITTED
INSURANCE
Multistate
Agreement AGREEMENT
(NIMA)
MULTISTATE
(NIMA)
• DRAFTED AND ADOPTED BY THE NAIC AND
ENDORSED BY SOME INDIVIDUAL STATES;
OPPOSED BY MUCH OF THE INDUSTRY
• INCLUDES AN ALLOCATION SCHEDULE
THAT PRESUMABLY WOULD BE USED BY
EACH PARTICIPATING STATE; PROVIDES
FOR A CLEARINGHOUSE WHICH
APPARENTLY WOULD/COULD RECEIVE TAX
PAYMENTS DIRECTLY FROM AN INSURED
•
NONADMITTED
INSURANCE
Non-admitted Insurance
MULTISTATE
Multistate
AgreementAGREEMENT
(NIMA)
(NIMA)
ALSO WOULD RESULT IN AN ADDITIONAL
LAYER OF REGULATION, THOUGH
APPLICATION TO INSUREDS IS NOT CLEAR
• ALLOCATIONS, e.g.:
–
–
–
–
–
PROPERTY
GL
AUTO
E&O
WORKERS' COMP
NONADMITTED
INSURANCE
Non-admitted
Insurance
(NIMA)
Multistate Agreement (NIMA)
• ANY TWO STATES CAN ENTER INTO NIMA
TOGETHER – IT'S A CONTRACT RATHER
THAN AN INTERSTATE COMPACT
• UNCLEAR WHETHER STATES WILL
ACTUALLY CONTRACT AND IF SO, HOW
MANY, BUT IT WILL BE LESS THAN ALL 50
STATES
Medical Programs
• BACKGROUND
– SINCE 2000, A NUMBER OF COMPANIES
HAVE SOUGHT PROHIBITED
TRANSACTION EXEMPTIONS WITH
REGARD TO VARIOUS TYPES OF
EMPLOYEE WELFARE BENEFIT PLANS
WHICH WERE REINSURED WITH THEIR
CAPTIVE INSURERS
MEDICAL
Medical
ProgramsPROGRAMS
• BACKGROUND
– SEE REV. RUL. 92-93, 1992-2 C.B. 45
– OTHERS HAVE INSURED MEDICAL STOP
LOSS PROGRAMS WITH THEIR CAPTIVES.
SEE ADVISORY OPINION 92-02A
Medical
MEDICAL
Programs
PROGRAMS
• PATIENT PROTECTION & AFFORDABLE
CARE ACT OF 2010
– IRC § 162(m)(6) PRECLUDES "HEALTH
INSURANCE PROVIDERS" AND ANY CONTROL
GROUP MEMBERS FROM DEDUCTING
REMUNERATION PAID TO ANY SERVICE
PROVIDER (INCLUDING, e.g., OFFICER,
EMPLOYEE, DIRECTOR, OR CONSULTANT) IN
EXCESS OF $500,000 PER ANNUM, SEE IRC §
162(m)(6)(c)(ii)
MEDICAL
PROGRAMS
Medical
Programs
• PATIENT PROTECTION & AFFORDABLE
CARE ACT OF 2010
– "HEALTH INSURANCE PROVIDER" IS AN ENTITY
THAT PROVIDES HEALTH INSURANCE
COVERAGE ("HIC") WHICH IS PROVIDED
DIRECTLY, THROUGH INSURANCE OR
REIMBURSEMENT, IF AT LEAST 25% OF
PROVIDER'S GROSS PREMIUM IS DERIVED FROM
HIC PROVIDING "MINIMUM ESSENTIAL
COVERAGE" INDIVIDUALS WILL BE REQUIRED
TO MAINTAIN UNDER NEW HEALTH CARE RULES,
SEE IRC § 162(m)(6)(c)(i)
Medical
MEDICAL
Programs
PROGRAMS
• PATIENT PROTECTION & AFFORDABLE CARE
ACT OF 2010
– MINIMUM ESSENTIAL COVERAGE" IS DEFINED AS
ONE OF ESSENTIALLY TEN KINDS OF COVERAGE
(INCLUDING MEDICARE, MEDICAID, SCHIP,
VETERANS HEALTHCARE, HEALTH PROGRAMS
FOR PEACE CORPS VOLUNTEERS, ELIGIBLE
EMPLOYER-SPONSORED PLANS, INDIVIDUAL
MARKET PLANS THROUGH STATE EXCHANGES,
GRANDFATHERED HEALTH PLANS AND OTHER
TYPES OF HEALTH INSURANCE ACCEPTABLE TO
THE SECRETARY OF HHS AND THE SECRETARY
OF THE TREASURY. SEE PPACA § 5000A(f)
MEDICAL
PROGRAMS
Medical
Programs
• PATIENT PROTECTION & AFFORDABLE
CARE ACT OF 2010
– EMPLOYERS THAT SELF INSURE ARE NOT
COVERED, SEE IRC § 162(m)(6)(c)(i)
– IRS NOTICE 2011-02
• INDEMNITY REINSURANCE NOT COVERED
• DE MINIMIS RULE IF LESS THAN 2% OF PREMIUM IS FOR
MINIMUM ESSENTIAL COVERAGE
• COMMENTS REQUESTED ON STOP LOSS
– PPACA § 9010 IMPOSES AN ANNUAL FEE ON
HEALTH INSURANCE PROVIDERS BASED ON THE
AMOUNT OF PREMIUMS WRITTEN
Medical Programs
• PATIENT PROTECTION & AFFORDABLE
CARE ACT OF 2010
– RATE – THE TAX IS BASED ON HEALTH
INSURANCE PROVIDER'S PROPORTIONATE
SHARE OF THE MARKET AS APPLIED TO AN
APPLICABLE AMOUNT (DESIGNATED FOR EACH
YEAR IN THE STATUTE)
– EFFECT ON QUOTA SHARE SESSION TO
CAPTIVE
Medical Stop Loss Policy POLICY
• ISSUE – IS MEDICAL STOP LOSS UNRELATED
BUSINESS FOR PURPOSES OF DETERMINING
WHETHER A DEDUCTION IS AVAILABLE FOR
RELATED PREMIUM
– COURTS CREATED TWO METHODS OF “RISK
SHIFTING”
• BROTHER SISTER RISK (E.G., HUMANA, KIDDE, HCA)
• SUFFICIENT UNRELATED RISK (E.G., SEARS, AMERCO,
HARPER AND ODECO)
– IRS REQUIRES DIVERSE POOL OF “INSUREDS”
FOR RISK DISTRIBUTION
• REVENUE RULING 2005-40
MEDICAL
STOPPolicy
LOSS POLICY
Medical
Stop Loss
• ISSUES – IS MEDICAL STOP LOSS UNRELATED
BUSINESS FOR PURPOSES OF DETERMINING
WHETHER A DEDUCTION IS AVAILABLE FOR
RELATED PREMIUM
– PER REQUEST FOR COMMENTS BY IRS,
SHOULD THIS BE CONSIDERED PREMIUM FOR
MINIMUM ESSENTIAL COVERAGE FOR
PURPOSES OF DETERMINING WHETHER IRC §
162(m)(6) APPLIES, i.e., WHETHER DEDUCTIONS
FOR COMPENSATION TO OFFICERS,
DIRECTORS, ETC., SHOULD BE LIMITED TO
$500,000 PER ANNUM
Medical Stop Loss Policy
• UNRELATED OR RELATED RISK
UNRLEATED
1. IRS HAS CONSISTENTLY
APPLIED A LOOK THRU
THEORY TO
INSURANCE AND
REINSURANCE
A. R.R. 2008-15
CASCADING THEORY
FOR FET
RELATED
1.
2.
POLICY FORM IS PAYABLE
TO EMPLOYER TO
REIMBURSE EMPLOYER
RE ITS OBLIGATION TO
PLAN
IN THE EVENT OF
INTERVENING
INSOLVENCY OF THE
EMPLOYER, ANALYSIS
DIFFFERS FROM AN
INSURED PROGRAM
Medical Stop Loss Policy
• UNRELATED OR RELATED RISK
ICAL STOP LOSS POLICY
UNRELATED
B. R.R. 1980-95 (FET
RATE)
C. TAM 200453012
(AUTO DEALER)
D. TAM 200453013
(AUTO DEALER)
E. R.R. 2009-26 (RISK
DISTRIBUTION)
RELATED
3.
4.
REV. RUL. 92-93 LOOKS
THROUGH TO PARTICIPANTS
APPARENTLY BECAUSE
ASSETS HELD BY INSURER
ARE PLAN ASSETS, i.e., PAYS
EMPLOYEES DIRECTLY
DOL DISTINGUISHES
BETWEEN A STOP LOSS
POLICY (WHICH IS NOT A
PLAN ASSET), SEE ADVISORY
OPINION 92-02A, AND PTE'S
WHICH DEAL WITH PLAN
ASSETS
Medical Stop Loss Policy
• UNRELATED OR RELATED RISK
UNRELATED
RELATED
5.
2. IRS DETERMINED
MEDICAL INSURANCE
WAS UNRELATED RISKS
IN R.R. 92-93 AND R.R. 9294
3. QUESTION THE
APPLICABILITY OF STATE
LAW OR ERISA TO A
FEDERAL TAX LAW
DETERMINATION
.
UNDER STATE LAW, STOP
LOSS IF TREATED AS SUCH,
IS NOT SUBJECT TO STATE
MANDATES AS TO
COVERAGE. LOOKS TO
MATURE IF UNDERLYING
RISK BEING COVERED.
Loanbacks
• ISSUE – WILL A LOANBACK HAVE AN
ADVERSE TAX CONSEQUENCE ON A
OTHERWISE VALID INSURANCE
ARRANGEMENT AND IF SO, WHY?
– CURRENTLY NO TAX LAW LIMITS THE USE OF
LOANBACKS FOR FEDERAL INCOME TAX PURPOSES
– COMMONLY USED IN “NON INSURANCE GROUPS”
– POSSIBLE ATTACKS
•
•
•
•
SHAM
LACK OF RISK SHIFTING
FAILS COMMON NOTIONS OF INSURANCE
CIRCULAR CASH FLOW
Loanbacks
• FACTORS TO BE CONSIDERED
– EVIDENCE OF OBLIGATION/
DOCUMENTATION – NOT JUST A BAR
NAPKIN
Joes Bar & Grill
XYZ CORP
OWES
ABC CAPITAL
$50,000,000
BY_________________________
CFO
Loanbacks
• FACTORS TO BE CONSIDERED
– AMOUNT
• CAPITAL
• PREMIUM
• IS THERE A LIMIT? (50% RULE???)
– SECURITY
– ABILITY TO REPAY
– LIQUIDITY
• ACTUARIAL EVIDENCE
• IDENTITY OF DEBTOR
Loanbacks
• FACTORS TO BE CONSIDERED
– REGULATORY APPROVAL
– INTEREST
• RATE
• PAYMENTS
• NETTING
• CAN YOU VARY WITH A 24 HOUR DEMAND
FEATURE?
– EVIDENCE OF ISSUES CONSIDERED BY THE
BOARD OF THE CAPTIVE
• CREDIT RATING OF COUNTER-PARTY
• CASH FLOW NEEDS
Economic Substance/Business
Purpose
• ISSUES – ON MARCH 18, 2010, THE “ECONOMIC
SUBSTANCE” DOCTRINE (IRC §7701(o)) BECAME
LAW AS PART OF THE HIRE ACT (THE “ACT”).
– The Act States that “in the case of any transaction to which the
economic substance is relevant, such transaction shall be treated
as having economic substance only if:
• (a) the transaction changes in a meaningful way (apart from Federal income
tax effects) the taxpayer’s economic position, and
• (b) the taxpayer has a substantial purpose (apart from federal income tax
effects) for entering into such transaction.”
• WHAT LEVEL OF ECONOMIC SUBSTANCE IS
REQUIRED FOR A CAPTIVE INSURANCE COMPANY?
• WHAT IS THE “BUSINESS PURPOSE” OF A CAPTIVE?
Economic Substance/Business
Purpose
– SEVERAL CASES CITE “COST OR LACK OF COVERAGE”
OR “INSURANCE COMPANY REFUSED COVERAGE” AS
BUSINESS DRIVERS FOR ESTABLISHING A CAPTIVE
– CAPTIVE FEASIBILITY STUDIES INCLUDE A LONG LIST OF
REASONS FOR FORMING A CAPTIVE
• ACCESS TO REINSURANCE MARKETS
• RISK PROFIT CENTER
• ETC.
– THE IRS ON CAPTIVE EXAMS HAVE BEEN REQUESTING
COPIES OF THE FEASIBILITY STUDY AND ASKING IF THE
BENEFITS CITED WERE ACHIEVED
Economic Substance/Business
Purpose
– THE BUSINESS PURPOSE OF THE CAPTIVE WAS
ESTABLISHED WHEN THE OWNER CHOSE TO RETAIN
RISK (AND THE ASSOCIATED ECONOMICS)
• RETENTION OF POTENTIAL PROFIT OF THE INSURANCE COMPANY
IS THE ECONOMIC TEST TO BE CONSIDERED
• SAVINGS FROM OTHER “BENEFITS” ARE IRRELEVANT
– FORMATION OF THE CAPTIVE TO “HOUSE” THIS RISK IS
MERELY TAX STRUCTURING
QUESTIONS