Watch the Webinar: Time for a Captive Checkup?

Most of us stay on top of things like dental cleaning appointments and routine car maintenance without giving it much thought, but we’re afraid a lot of companies aren’t treating their captives the same way. Our team recommends regular “captive check-ups” every few years for a variety of reasons, and have a clear, proven system for taking organizations through this refeasibility process.

Spring Partner and Chief Actuary, Steven Keshner, along with our Senior Actuarial Consultant and property & casualty expert, Peter Johnson, led an educational session on captive optimization through

Captive Optimization

refeasibility studies. With a combined 40 years of experience in the insurance, actuarial and captive industries, the two have a wealth of knowledge to share, and we wouldn’t want you to miss it.

Fill out the form below to view and listen to our webinar, “Time for a Captive Checkup?” which was conducted live in September of 2017. You’ll take away valuable learnings, such as:

  • The importance of refeasibility and the different factors that make it necessary
  • A recommended, step-by-step refeasibility process including suggested strategies, modes of measurement, and how to piece everything together
  • Questions to be answered through your captive check-up
  • Resources for getting started

 

Your Captive is Riding High. Now What?

captive refeasibility studyYou’ve had your P&C captive for years and it has continued to perform well throughout. So what is next? How do you capitalize on this success and build on your captive or rebuild an underperforming aspect of it?

Enter refeasibility.

Much like your family car, a captive should have a check up on a periodic basis. Are you writing the right lines in your captive? Are you in the right domicile? Would a different structure be more profitable? Would other service providers make a difference? Have your claims changed significantly? Have regulations changed over the years? All this and more can be answered with a good review of your captive by a professional consultant.

Related Case Study: Captive Refeasibility Study for Fortune 500 Organization

Here are a few things to consider as you ponder a refeasibility study:

Domicile:

The Dodd Frank Act changed the landscape for a lot of captives.  Rather than incur a self-procurement tax for risk out of state, some captive owners are redomesticating their captive back to their corporate home states or establishing a fronting captive in that domicile to lessen the premium taxes due.  An additional dimension in captive domicile selection is the enormous growth in U.S. domiciles. Countless states have recently set up new domiciles and there are still many quality offshore options. You’re pretty sure you are in the right spot, but a “refeasibility” might show you otherwise.  For example, some states have created innovative cell legislation that might work for you or your clients. Some assets held in the captive maybe more liberal, so depending on what you are using for collateral, states need to be studied for the best match.

P&C Programs:

Ten years ago there were pretty much only large P&C captives writing pretty much only property, general liability and workers compensation and occasionally a rouge auto or warranty program. Captives stuck to high deductible programs and some small quota share coverages to fill out a line slip.

Today, you can write almost anything that is an insurable risk and makes good business sense.  You still can’t write lines of coverage that just don’t make sense (like tidal wave coverage in Kansas), but you have a great deal more flexibility and room to be creative in how you define and insure your risk.

Contingent business interruption is sometimes an uninsurable or underinsured risk, and a good candidate for the captive.  Some use their captive to front their global or international property program, selling off pieces out the back and taking a nice fronting commission for themselves: the market would have gotten this if they didn’t.   Others write business specific coverage like lost in hole drill coverage for oil companies.

Cyber Risk:

Cyber risk is another good candidate for a captive. Cyber insurance in a captive insulates an organization from the market becoming less competitive in the future. It also gives a captive owner a great opportunity to diversify their existing captive portfolio. The captive can also be used to provide coverage that might not be really available in the market, such as future lost revenue of first-party loss of inventory due to technology failure.

Benefit Programs:

Now we have benefit programs that are really taking off as captive programs.  Prefunding retiree medical, group term life, medical stop-loss coverage, foreign coverage are just a few of the programs that make sense to add to the captive portfolio. And with some of these programs, the premiums qualify as third-party business and may boost your captive returns with a positive tax affect.

Additionally, for U.S. employers, the regulatory hurdles to funding ERISA-covered benefits in a captive have never been lower with the renewal of the expedited process for securing a prohibited transaction exemption. Couple that with the growing costs (and concerns) surrounding the Affordable Care Act in the U.S. and now is clearly the time to at least be considering funding benefits in your captive.

Find out more about funding benefits in a captive here.

Conclusion:

Regardless of how old or new your captive is, there are a number of internal and external factors that have changed since it was created. Now is a great time to have a professional come in and not only take a snapshot of how your captive is currently performing, but also help you project and strategize where your captive should be in the future. Now is a great time for a captive refeasibility study.

If you agree that it is time to re-evaluate your captive, Spring is poised to step in and help out. Our team of captive consultants, actuaries, underwriters, strategists, accountants and lawyers have decades of experience helping companies similar to yours not only set up their captives, but also conduct through and thoughtful refeasibility studies, which have helped our clients realize continued success with their captive.

Find out more about Spring’s Spring CARE captive optimization product and related services here.

Please contact us using the form below if you’d like to chat with a member of our team about your captive’s current and future performance.

Webcast: A Look at How and Why Colleges are Funding Health Insurance Using a Medical Stop-Loss Captive

medical stop-loss captive

Recently, Spring Senior Partner John Cassell presented a session on colleges funding health insurance using a medical stop-loss captive. The session covers how to create a medical stop-loss captive, the economies and efficiencies that can be achieved and why colleges and universities should have this on their radar.

In this webcast, John is joined by Spring Partner Teri Weber and Tracy Hassett who is Vice President, Human Resources at Worcester Polytechnic Institute in Worcester, Massachusetts.

Worcester Polytechnic Institute is a member of Ed Health, a successful example of a group of colleges and universities that banded together to form a captive to fund their medical stop-loss coverage. Ed Health has completed its first year and is already generating significant savings for its expanding base of members.

Photo by 401(K) 2013

IRS Revenue Ruling 2014-15: More Opportunity to Fund in a Captive

IRSBy: Tom King and Josepha Conway

For companies that provide retiree benefits, administration and funding tend to be dually burdened by the requirements imposed by the Employee Retirement Income Security Act (“ERISA”) and the often significant financial reporting standards of the U.S. Generally Accepted Accounting Principles (“GAAP”).  Adding further to the burdens are the significant cost increases over the last decade, primarily as a result of lower discount rates.  As a result, plan sponsors are faced with the difficult decision of choosing between reducing or eliminating retiree medical benefits.

Luckily for sponsors of retiree medical plans, a potential solution exists that promises to add financial efficiencies, while potentially lowering costs and lowering cost volatility.  That solution is a captive insurance company writing a fronted Trust Owned Health Insurance (“TOHI”) Program, which according to the May 9th, 2014, Internal Revenue Service (“IRS”) Revenue Ruling 2014-15, may be just the right mechanism for funding retiree benefits.

Previous State:

Plan sponsors have traditionally funded retiree medical benefits through pay-as-you-go funding (paying current retiree benefits without any advance funding) or through one of the following funding vehicles:

  • -Voluntary Employee Beneficiary Association (“VEBA”)
  • -VEBA with Trust Owned Life Insurance (“TOLI”) through a captive  (rather than holding traditional investments, the VEBA can purchase life insurance policies)
  • -401(h) account
  • -Trust Owned Health Insurance (“TOHI”) through a captive  (rather than holding traditional investments, the VEBA can purchase health insurance policies)

VEBAs

Pre-funding retiree benefits through a VEBA is often inefficient.  Employers who fund a portion (or all) of the APBO are able to offset the liability.  However, while contributions to the VEBA may be tax-deductible, the investment income from the VEBA may be subject to the Unrelated Business Income Tax (“UBIT”), which taxes investment earnings on funds supporting non-collectively bargained benefits.

TOLI in a Captive

Purchasing life insurance through a VEBA to cover retiree medical benefits, while cost-effective, has a number of drawbacks.  It requires that the plan sponsor deliver the challenging message that they are purchasing a life insurance policy on an employee who may not be eligible for retiree medical benefits.  In addition, the policy is mismatched to the liability (life versus health) and requires a significant amount of cash flow management. Ultimately, it is the trust and other employees and retirees that receive the payment of the death benefit of an employee versus the employee’s beneficiary.

401(h) Account

Funding retiree medical benefits through a 401(h) account requires that plan sponsors meet high Qualified Pension Plan funding levels (typically, in excess of 125%),  set by ERISA, in addition to more stringent funding requirements.  In addition, contributions made to a 401(h) account are permanent, and restrict the Plan Sponsor’s ability to reduce or eliminate benefits in the future.

TOHI in a Captive

Prior to the IRS issuance of Revenue Ruling 2014-15, plan sponsors seeking to fund retiree benefits through a captive arrangement with TOHI were required to obtain both a  Private Letter Ruling (“PLR”) from the IRS for the tax treatment of the TOHI policy and a Prohibited Transaction Exemption (“PTE”) from the United States Department of Labor (“DOL”).

In addition to these regulatory requirements, employers were required to fund ERISA governed employee benefits through an audited captive that covered property and casualty (“P&C”) insurance. In other words, employers could not establish a new captive specifically for funding ERISA benefits.

As a result, the use of captives to fund retiree health benefits has been limited to employers with already established captives or to employers funding non-ERISA employee benefits which do not require DOL approval.  In short, the regulatory and established captive requirements have historically resulted in the under-utilization of a captive for the financing of retiree benefits.

Summary of RR 2014-15:

With the issuance of IRS Revenue Ruling 2014-15, employers can now fund retiree medical benefits with a non-cancellable accident and health insurance policy (i.e. TOHI) and have it receive life insurance treatment without obtaining a Private Letter Ruling.  The impact of life insurance tax treatment is that reserves grow tax-free.  In order to receive life insurance treatment without obtaining a PLR, the following facts and circumstances must be met:

  • -The Company maintains a VEBA Trust that satisfies the requirements of 501(c)(9) (the VEBA code section) and contributes directly to the VEBA for the provision of retiree health benefits
  • -The Company purchases a non-cancellable accident and health coverage policy from an insurance company, who then reinsures the policy through the Company’s captive
  • -Both the Company and the VEBA retain the right to cancel the retiree health coverage at any time

The result is:

  • -The Company’s captive is regulated as a life insurance company and gets life insurance company tax treatment (i.e. tax free accumulation if used to pay benefits)
  • -VEBA Assets used to purchase the policy are no longer subject to UBIT
  • -The policy receives life insurance reserving treatment, which is effectively tax free growth in reserves if held until the benefits are paid
  • -Employers may receive accelerated deductions subject to an IRS limit
  • -Reduction in ASC 715 Expense (formerly FAS 106)
  • -Overfunding in the captive can be used to fund active employee health benefits

A few things to note:

1.)  The non-cancellable accident and health insurance purchased by the VEBA is deemed life insurance because under 26 USC §816(a),  captive that writes more than 50% of its business in life insurance during the year is treated as a life insurance company.

2.)  Risk shifting occurs because the retiree health benefits provided by the plan are spread across a large group of retirees.   By pre-funding the retiree medical benefits in a captive, this risk is transferred from the retirees to the captive.

3.)  While the issuance of a PLR from the IRS is no longer required, the PTE requirement remains as the funding of the benefits is a prohibited transaction.

Impact on Retiree Medical funding:

U.S. GAAP sets out stringent employer requirements when it comes to accounting for the accrual of estimated total retiree medical and other benefits.  This includes retiree medical and retiree life insurance payable to current employees throughout their lifetimes, which must be listed on the company’s balance sheet (the Accumulated Postretirement Benefit Obligation, or APBO).  This requirement, however, does not force employers to fund these obligations. Employers are merely required to recognize them.  Recognition nonetheless creates a liability without an offsetting asset, and always begs the question, “How will the company pay for these benefits?”

Employers offering retiree medical benefits often respond to the above question by either restricting eligibility requirements, closing the plan to employees who retire after a certain date, increasing the retirees’ portion of the premiums, increasing co-insurance payments and deductibles, and/or modifying or reducing plan benefits.

Due to IRS Revenue Ruling 2014-15, however, employers may be more easily able to use funds from the VEBA to purchase a TOHI or non-cancellable accident and health insurance policy which is then reinsured through a captive.  The captive will then hold the assets that were previously held by the VEBA, and properly offset the liability, decrease ASC 715 Expense, and minimize the net present value costs of operating the plan.

How this works:

When a contribution is made to the VEBA, employers can deduct the contribution, subject to the Qualified Asset Account Limit (“QAAL”).  For post-retirement medical and life insurance benefits, the QAAL for any taxable year may include a reserve funded over the working lives of the covered employees and actuarially determined on a level basis, and typically covers 30%-50% of the APBO.  If a company’s unfunded APBO is $100 million, the company will generally be able to contribute up to $50 million into the VEBA while deducting the contribution.  At a 35% effective tax rate, the value of the tax deduction is $17,500,000.  As a result, the net cash required to offset $50 million of liabilities is $32,500,000.

When the VEBA in turn purchases a TOHI policy, benefits may include tax-free reserve accumulation (due to the captive being treated as a life insurance company for tax purposes), reduced balance sheet volatility, and increased operating income through the reduction of retiree medical costs.  Moreover, a company engaging in pre-funding retiree medical liabilities demonstrates a clear financial commitment to retirees’ welfare.

Summary:

In closing, the IRS Revenue Ruling 2014-15 explicitly permits companies to use captives for the purpose of funding retiree health benefits without obtaining a PLR from the IRS provided certain conditions are met.  This ruling, while specific to retiree medical benefits, could potentially be extended to pension plan benefits. While further analysis is required, employers with funded or unfunded retiree benefits should take note of the ruling and take a closer look at funding their retiree benefits through a captive.

Image credit: Simon Cunningham via flickr

Congress Moves to Exempt Expatriates From ACA Requirements

UN member flagsAnother day, another Affordable Care Act (ACA) exemption…

This week, Congress passed legislation that exempts expatriate health plans from the health care coverage mandated in the ACA. H.R.4414 ensures that U.S. nationals working abroad, and the companies that employ them, are now exempt from the requirements and penalties of the ACA providing they do provide an expatriate health insurance plan.

The exemption was made to ensure domestic insurers offering coverage to these companies and employees were able to compete with foreign insurers that do not have to comply with ACA regulations.  Some of these insurers had been considering moving the divisions and employees that write these expatriate plans overseas.

Expatriate health insurance is an excellent fit for captives and this exemption is great news for employers that have expatriate workers and are considering writing their employee benefits into a captive.

Of course, this is just another reminder that the ACA is very much a work in progress and there are many wrinkles and nuances still to be ironed out. You can be sure that we will stay on top of the ACA developments that matter most to employers and bring you summaries like this one as things develops. For ACA updates in your inbox, as they happen, please sign up for our email updates in the box to the left of this article.

Image credit: WorldIslandInfo.com via flickr

Captives Quickly Becoming the Accepted Means of Offsetting Rising Employee Benefit Costs (Study)

employee benefit captiveEarlier this month, the Captive Insurance Companies Association (CICA) released their Annual Captive Insurance Market Study at their annual conference in Scottsdale, Arizona. This is the 14th consecutive year that CICA has released this survey, which is widely accepted as a barometer for the captive industry.

It is always interesting to see what direction the captive owner community is moving in. These are professionals on the front lines of risk financing who often see, and react, to the coming forces before some employers do.

This year, CICA polled 133 pure and group captive owners on a number of topics. There is plenty of insightful information that can be gleaned from the results, most notably to us was the rapidly growing interest in placing employee benefit in captives.

According to the survey, only 13% of pure captive owners and 8% of group captive owners currently wrote employee benefits in their captive.  These figures reflect coverage for medical (stop-loss), which is the most widely accepted employee benefits coverage for captives according to the respondents.  Another 9% and 6% respectfully of pure and group owners polled were likely to write medical stop loss  in their captive during the next three years.   Probably more telling of the reality of the market is that 41% of all pure captive owners surveyed will either be placing medial stop-loss or looking at placing it in their captive, with 31% of group captives saying the same thing.

Drilling down deeper, the report also highlighted additional areas where pure captive owners will be considering employee benefits program for their captives: 30% will consider Disability Insurance; 29% – Life Insurance; 26% – Accident & Health; 21% Foreign employee benefits; and about 7% will look at Retiree Medical.  For group captive owners, they are also considering funding their member’s employee benefit programs: 27% will look at group Accident & Health coverage; 21% – Disability; 17% Life Insurance; 11.5% Retiree Medical; and 6% will review foreign programs.

Unsurprisingly, according to CICA, Affordable Care Act (ACA) changes and delays are a driving force for the growing interest in seeking an alternative method of funding employee benefits.

The results of this survey are not surprising to our Captive Consulting Team. Over the past few years, we have seen a dramatic increase in client interest in alternative funding solutions for employee benefits. To meet this growing need, we have been working with insurers and service providers alike for years to help prepare them for this growing demand and to help create competition in the market place for our clients.  It is a win-win.

At Spring, we pride ourselves at staying ahead of the curve. By analyzing a number of factors, including external and political forces, our consultants are able to envision the direction of the industry and provide clients with the most innovative and beneficial solutions before everyone else.

Helping employers become more efficient fund their employee benefits in captives is not just another example of how Spring stays one step ahead of industry trends, it is how we drive industry trends through innovation and execution. We have been developing innovative employee benefit captive solutions for years; going so far as to develop patented funding methods for saving employer’s money.

See also: eBook: Funding Employee Benefits Through a Captive

If you are an employer that is feeling the crunch of rapidly increasing employee benefit costs and regulations and are seeking a way to fund your benefits in a more cost-effective and efficient way, you would likely benefit from speaking to our experienced consultants. Spring’s Employee Benefits, Risk Management, Captive Insurance and Actuarial Consultants can help you evaluate your business’ needs and determine if a captive is your best solution.

Contact us today and start putting the techniques used by more and more of those “in the know” in the captive industry to work for you.

 

Image credit: Chris Potter via flickr

CICA: “Do 831(b) Captives Right or Don’t Do Them At All”

831b captivesThe Captive Insurance Companies Association (CICA) Board of Directors recently adopted a statement clarifying their position on 831(b) captives (mini-captives). In this statement, the CICA Board highlighted their concern about the misuse of these captives by individuals and companies seeking nothing more than a tax shelter.

It was important for CICA to issue this statement and clarify their official position on this matter, given the negative effects that such misuse has on the reputation of the captive industry.

The statement is worth a quick read. It can be found here.

Image credit: Avery Studio via flickr

Employer Update: Latest Ruling Exempts Some Self-Insured Health Plans From the ACA Reinsurance Fee

Numbers And FinanceRecently, the Department of Health and Human Services issued final rules related to the reinsurance fee included in the Affordable Care Act (ACA). These rules specify employers that are exempt from paying it.

For those of you not up on the latest ACA lingo, the reinsurance fee is imposed on group health plans to help pay for coverage in the individual market. The fee is equal to the annual rate ($63 in 2014, $44 in 2015, TBD in 2016) multiplied by number of covered individuals in the plan to be paid in two installments. There are several ways to calculate total covered lives so it is important to determine which method is most advantageous for your firm.

There has been a bit of confusion as to who is subject to the fee and who isn’t when considering self-insured plans.

The bad news: Nothing changes in 2014; Everyone pays the fee.

The good news: For 2015 and 2016, health plans that are self-funded AND self-administered will be exempt from paying the fee. (Note: very few organizations will fall into this category.)

The key to this ruling is the term “self-administered.” Plans are only considered self-administered if the core administrative functions (claims processing, claims adjudication and enrollment) are handled internally and not by a third party administrator (TPA). Self-insured plans that outsource core administrative functions to a TPA are not considered self- administered and are still subject to the reinsurance fee. However, self-insured plans that use TPAs, but not for core administrative functions may also be exempt from the reinsurance fee

For more information about the final rule and a better description of what is and isn’t considered self-administered, please visit the Federal Register page or contact us.

Got ACA questions? Our team is on the front lines monitoring what is going on in Washington, as well as, in the individual states and can help your business navigate these uncharted regulatory waters. Contact our team if you have questions and need a little ACA guidance.

Image credit: Ken Teegardin via flickr