Regulatory Changes That Have Led to Increased Employee Benefit Captive Funding

Fifteen years ago, captives were not commonly used for financing employee benefits, as regulatory obstacles and reinsurance restrictions limited eligibility to only the largest of captives.

The DOL must approve the placement of ERISA benefits into pure-parent captives. Many well-known organizations have obtained funding approval, including ADM, Alcon Labs, Alcoa, AGL Resources, Astra Zeneca, Banner Health, International Paper, Memorial Sloan-Kettering Cancer Center, Sun Microsystems, and United Technologies.

Many more companies have used captives to fund other non-ERISA employee benefits that do not require DOL approval. Moreover, employer groups and associations are establishing captives to fund employee benefits, thus offering an alternative to the commercial insurance markets and providing an incentive for membership growth.

For companies with property & casualty captives, certain employee benefits may be “unrelated business,” i.e., insurance business unrelated to the captive’s parent. Adding unrelated business to a single-parent captive can improve the captive’s overall financial efficiency; satisfy the need for third party business allowing the parent to deduct its captive premiums from its U.S. federal income taxes; and create additional cost savings.

Regulatory changes have led to increased employee benefit captive funding. Some of these changes include the following:

  • Internal Revenue Service clarifies risk shifting/distribution and unrelated business requirements

In 1993, the IRS ruled[1] that certain employee benefits insurance written in a pure captive is unrelated business (to the captive’s parent) since it benefits the employee and not the employer.  In 2002, the IRS issued three revenue rulings clarifying the qualification of captives as insurance companies for federal income tax purposes, including discussions of third party business, brother-sister arrangements and group captives.[2]

  • The DOL review process provides a roadmap to funding

If the proposed transaction is subject to ERISA, the DOL has a streamlined process for approval.

  • GASB 45 and FASB 158 requirements raise awareness of post-retirement liabilities

Accounting rules such as GASB 45 and ASC 715 (formerly FAS 87/106 and amended by FAS 158) require that organizations account for retiree medical and pension obligations.  These requirements encourage employers to not only account for the liabilities, but also to seek efficient funding methodologies. In addition, GASB statements 74 and 75 are increasing the required disclosures for public retiree medical obligations.

  • Court rulings clarify the parameters for funding retiree medical programs

In Wells Fargo & Co. v. Commissioner 224 F.3d 874 (8th Cir. 2000), the tax court clarified the amount that can be set aside to fund retiree medical benefits, expanding the potential funding allowed to employers.

  • Revenue Ruling 2014-15 clarifies funding opportunities for retiree medical programs

In 2014, the IRS ruled in Revenue Ruling 2014-15 that Non-cancellable Accident and Health Insurance policies will receive life insurance tax treatment as long as the following facts and circumstances are met:

-The Company maintains a VEBA Trust that satisfies the requirements of 501(c)(9)

-The Company purchases a Non-cancellable Accident and Health policy from an insurance company and reinsures the policy through the captive

-Both the Company and the VEBA retain the right to cancel the retiree health coverage at any time

As a result, insuring non-collectively bargained retiree medical benefits through a captive allows for tax-free growth of reserves without the need for a Private Letter Ruling.

Want to Learn More?

Download our Risk Manager’s Guide to Employee Benefit Captives to find out all you need to know about this increasingly popular funding option.

 

[1] IRS Revenue Ruling 92-93

[2] IRS Revenue Rulings 2002-89, 2002-90 and 2002-91

Cell Captives: The Right Fit for Many Small and Mid-Sized Businesses

Cell Captive StructureWhat is a Cell Captive?

A protected cell company (PCC) is a legal entity, set up by a sponsor, which is divided up into individually protected cells that are rented out by the sponsor to companies or groups who want to use a captive cell to fund various risks. The sponsor establishes the core of a PCC and the overall PCC structure. Once established, the sponsor also manages the PCC’s day-to-day activities, allowing cell owners to avoid a lot of the corporate and administrative resources typically required for a captive insurance or reinsurance company.

With a PCC, you essentially benefit from pooled administration, but not risk. Each cell in a PCC is independent of and insulated from the others and the core in terms of assets and liabilities. Often, PCCs will allow companies to own more than one cell, and typically each cell is still treated individually.

See also: The Benefits of Captives for Small and Mid-Sized Businesses (White Paper)

What are the Benefits to a Cell Captive

There are a number of benefits to insuring your risk using a protected cell company:

  • Easy entry into funding risk – While you still have to clear the typical regulatory hurdles of setting up a captive which vary greatly depending on the risk in question, a great deal of the administrative time and money that you would typically spend is eliminated since we have already set up the shell entity for you.
  • Economies of scale – With a protected cell company, you enjoy continued administrative savings due to economies of scale from potentially pooled administrative costs.
  • Professional captive management – As an owner of a cell, you generally can expect day-to-day management services from professional captive managers.

Is a Protected Cell Captive right for you?

Participation in a protected cell captive is attractive, but not for everyone. Generally speaking, mid-sized companies that are dipping their toes in captive funding are the likeliest participants given the lower barriers to entry and management assistance a PCC offers. That said, there are a number of other reasons why companies of all sizes would strategically use a cell captive to address their risk portfolio. A feasibility study will go a long way in identifying if a company is a good fit for participation in a PCC.

Want to Learn More? Contact us today to discuss a captive feasibility study, which will determine your funding requirements and whether a captive is right for you.

Spring Named Actuarial Firm of the Year Again!

top actuarial firmIt was announced last night that Spring has once again been awarded the “Actuarial Firm of the Year” U.S. Captive Service Award.

The U.S. Captive Service Awards are awarded annually, by the industry publication Captive Review, to recognize “excellence in the delivery and management of captive insurance and celebrate innovation, commitment and expertise in the captive insurance field.” The awards were presented in a gala last night that kicked off the Vermont Captive Insurance Association (VCIA) annual conference in Burlington, Vermont.

This is Spring’s second time receiving this high honor. We also won it in 2013.

Our actuarial team assists organizations ranging from insurance carriers to Fortune 100 companies and their captives to local small businesses with critical services such as statistical and financial analysis, product development and pricing, growth strategy, reserving, financial projecting and compliance.

More info about our actuarial work can be found here.

“We are very grateful to the Captive Review judges and our industry peers for bestowing this prestigious honor on our team,” commented Steven Keshner, Spring Partner and Chief Actuary. “It is very heartening to see this growing group of talented actuaries recognized for their continual hard work and extreme client dedication.”

More information about the 2016 U.S. Captive Service Awards can be found here.

Spring Heads to Vermont for VCIA 2016

vcia 2016For the 13th consecutive year, the Spring captive insurance team is heading to Burlington, Vermont to sponsor and speak at the Vermont Captive Industry Association (VCIA) annual conference.

This year, the Spring VCIA contingent consists of Karin Landry, John Cassell and  Prabal Lakhanpal. The event will be held at The Sheraton Hotel and Conference Center in Burlington Vermont. VICA regularly attracts hundreds of industry professionals from across the globe.

Spring is proud to once again be a conference exhibitor. If you are heading to the conference, be sure to stop by our booth (#2) and say hi. We will be handing out plenty of goodies throughout the day and you will not believe what we are giving away this year as a raffle prize!

We are also very excited that members of Spring’s team will be participating in two educational sessions at VCIA this year. Managing Partner Karin Landry will be presenting a session titled “Captive Re-Feasibility Studies: Remake of a Classic.” In this session Landry and her co-presenters will examine the importance of conducting refeasibility studies on existing captives periodically and how to do so.

Spring Senior Partner, John Cassell will also be presenting at VCIA this year. Cassell’s session, titled “The Original Employee Benefit Captives: Where are they Now? “ is a discussion centered on Spring’s recent survey of the “pioneers” of benefit captive funding and how these original companies have fared years later.

VCIA runs from August 9-11. For more information on the VCIA conference can be found on their website.

Funding Medical Stop-Loss in Captives: What You Need to Know (White Paper)

Spring Medical Stop Loss Captive White Paper 2016Healthcare reform, increasing costs, lazered coverage and leveraged trends are causing many employers to reconsider their stop-loss options. These include employers who are fully insured considering a move to self-insurance and current self-insured employers.

Healthcare reform mandates have led to many employers to review the cost of their medical insurance programs including funding alternatives and the need for additional stop-loss coverage. Deciding to insure medical stop-loss and fund it in a captive has proven to be a great way for employers who self-fund their health coverage to add a layer of protection from excessively high individual or aggregate health claims and meet ACA requirements.

Medical stop-loss is not considered first dollar health insurance benefit and thus stop-loss captives are not subject to Department of Labor approval in the United States like many benefits are. Also, by funding stop-loss in a captive, an employer gains access to lower-cost reinsurance they might otherwise not be eligible for as a direct purchaser.

This white paper explains how medical stop-loss captives work, the common types of medical stop-loss captives and who should consider one. We hope you find it helpful and enlightening. If you have any questions at all, please don’t hesitate to contact our captive consulting team. All of our contact information is listed on the final page or this paper.

To get your FREE copy of this white paper, please fill out the form below:

Spring Shortlisted For 2 Prestigious Captive Insurance Awards

captive insurance awards

Image Credit: Captive Review

We were excited to find out that Spring has made the “short list” for two 2016 US Captive Services Awards.

The awards, presented by the highly regarded industry publication Captive Review, “recognize and reward those providers of captive insurance products and services who have outperformed their competitors and demonstrated the highest levels of excellence over the past 12 months.”

This year, Spring is nominated for Actuarial Firm of the Year and Employee Benefits Consultant.

In the past, Spring has been the recipient of a number of US Captive Services Awards including Actuarial Firm of the Year, Employee Benefits Consultant and Captive Professional of the Year.

The 2016 US Captive Services Awards winners will be announced on Monday, August 8th at the Hilton in Burlington, Vermont during the Vermont Captive Insurance Association’s (VCIA) annual conference. Spring’s Managing Partner, Karin Landry, and Senior Partner, John Cassell will also be presenters at the VCIA conference this year. We will have more info on that to come soon in an additional post.

The full shortlist can be found here. More information about the US Captive Services Awards can be found here.

Spring Partner to Present at DMEC 2016

dmec 2016DMEC is widely considered to be one of the premier human resource industry gatherings. This year, we are fortunate to have Spring Partner Karen English along with Jane Ryan from the Mayo Clinic, Trina Mouton from CenterPoint Energy and Patrick Leary, a health and productivity professional, giving a presentation titled “Ready or Not Workers’ Comp- Here We come!” Attendees of this session will learn how that risk can be avoided, and ultimately how to successfully bring risk management and benefits together for an integrated approach to disability, workers’ compensation, and leave at their organization.

This year’s DMEC conference will run from July 18-21 at The Hilton New Orleans Riverside.

If you are heading to the DMEC conference, be sure to stop by our booth #401 and sayhi to Karen and fellow Spring Partner Teri Weber. We will be handing out plenty of goodies throughout the day and you will not believe what we are giving away this year as a raffle prize!

More details about the event, including registration information can be found here.

The Benefits of Captives for Small and Mid-Sized Businesses (White Paper)

Captives for Small Mid Sized Businesses While they were once almost exclusively risk funding mechanisms for the largest of corporations, captives have evolved over the years and a suite of captive funding options have been developed to assist businesses of all sizes.

In this paper, we seek to educate you about captive insurance, the history, benefits and the options available to small and mid-sized companies. We will explain what a cell captive is and how it can be an excellent entry point for a company into captive insurance. Finally, we will explore the next steps for your business if you decide that captive funding of your company’s risk might be a good choice and would like to explore it further.

We hope you find this paper helpful and enlightening. If you have any questions at all, please don’t hesitate to contact our captive consulting team. All of our contact information is listed on the final page or this paper.

To get your FREE copy of this white paper, please fill out the form below: