Why clarity on micro-captives benefits everyone

By Mark Logsdon

Micro-captives are also known as 831(b) plans or small captive insurance. I’ve witnessed the confusion and misinformation surrounding micro-captives, and it's time to set the record straight on several critical points.

1. Section 831(b) is not about exploiting loopholes or avoiding taxes; it's about ensuring that small-business owners have a legitimate way to protect themselves against unforeseen risks not covered by traditional insurance plans or companies.

2. Micro-captives are not a wealth transfer tool. When Congress updated this Section of the tax code in 2015 (PATH Act) a provision that had been exploited in the past for generational wealth transfer was closed. While some did exploit a provision of this section in the past, it has been properly closed and is now used as intended by Congress. It provides a legitimate and valuable way for small businesses to manage their risks and protect their assets, as well as ensure their companies stay solvent during difficult and unforeseen events such as during the COVID-19 pandemic.

The lack of clear guidance from the IRS has created confusion and, in some cases, led to unintentional misuse of micro-captive insurance. This is not an issue of micro-captive insurance being a bad tool, but what appears to be intentional lack of clarity from the IRS. This has led to some business owners unknowingly making poor choices with respect to micro-captives due to this lack of clarity from the IRS.

Small-business owners want clarity and clear guidance from the IRS. Well-thought-out guidelines would be welcomed.

As a Texan, I am happy to say that Texas has domiciled captives for more than 10 years and is seen as one of the leaders and fastest-growing states in the industry. Texas always deals with natural disasters, between tornadoes, hurricanes, and floods, and we need more tools to help our small business owners tackle the myriad challenges facing them especially with the ongoing traditional insurance market challenges. Micro-captives provide a critical tool for Texas businesses to meet their business and risk protection needs.

Micro-captives present a way for small businesses to set aside tax-deferred dollars under a section of the tax code that should operate similarly to 401(k)s. It's time for the IRS to step up and provide clear, concise guidelines. Focused guidelines not only benefit small businesses by providing them with a way to protect themselves but also contribute to a more transparent and ethical insurance industry overall. If we want to see the younger generation succeed as they establish their own businesses or take over the family business, we need to see action from Congress.

At the end of last year, members of the House Ways and Means Committee took an important first step by sending a letter to IRS Commissioner Daniel Werfel in support of small captive insurance. This letter was spearheaded by Rep. Beth Van Duyne, R-Texas. I’m calling on her to continue this work, while also asking Sen. John Cornyn, R-Texas, who sits on the Senate Finance Committee, to take note of how important micro-captives are to his small-business constituents. If we do not see proper support for this critical insurance need, small businesses will suffer and so will the economy.