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Captive owners face evolving tax qualification, enforcement issues - Business Insurance Skip to content Register for free Search Search Log In Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Captive owners face evolving tax qualification, enforcement issues by Gavin Souter Alternative Risk Transfer/Captives Aug 13, 2026 BURLINGTON, Vermont – Captive owners should regularly review whether their programs continue to qualify as insurance for federal tax purposes because changes in coverages, corporate structures and financing arrangements can alter their tax treatment, experts said. Risk managers should also pay close attention to documentation, how risks are priced and distributed, and transactions between captives and their parents, they said Wednesday during a session at the Vermont Captive Insurance Association’s annual conference. A captive’s status as a regulated insurance company does not automatically make it an insurance company for federal tax purposes, said Bailey Roese, a Columbus, Ohio-based partner at Dentons Bingham Greenebaum. A captive that fails the federal tax tests may still be an insurance company for state tax purposes and may still face premium or self-procurement taxes, she said. Federal qualification generally requires genuine insurance risk, risk shifting and risk distribution, with the captive also operating in a manner consistent with commonly accepted notions of insurance, said Kristen Lawler, tax partner at Crowe in New York, who moderated the session. Failure to qualify can have significant consequences, including loss of premium deductions and potentially penalties and interest, she said. Captive owners should decide what tax treatment they seek and periodically check that their programs continue to support that goal, said Jean Baxley, managing director, Washington national tax, at Deloitte Tax. Qualification is determined annually and changes to coverage or insured entities can affect the outcome, she said. “You can always cancel a coverage, you can always bring in more coverage, you can always change something during a tax year,” Ms. Baxley said. Once the year is over, however, the captive’s activities during that period determine its tax status. Contemporaneous documentation is important, including actuarial support for pricing and records showing that coverage decisions are considered during renewals, she said. “Actuarial documentation goes a long way,” Ms. Baxley said. Captive owners should also be cautious about transactions that could appear to undermine genuine risk transfer, including premium refunds and loans from a captive to its parent or affiliates. While the IRS has evolved its view, “there’s no bright line” governing loan backs, Ms. Baxley said. Risk distribution remains a complex area, particularly when captives do not fall within established IRS safe harbors. A safe harbor provides a set of circumstances that give taxpayers greater certainty about how the IRS will treat an arrangement. IRS Revenue Ruling 2002-90 recognized a captive arrangement involving 12 insured subsidiaries, each accounting for between 5% and 15% of the total risk. Captives outside those parameters can still qualify, but the analysis depends more heavily on their individual circumstances. Determining whether sufficient risk distribution exists can involve the number of insured entities and exposure units, third-party business, and how policies were originally priced, said Allan Autry, a Raleigh, North Carolina-based partner at Johnson Lambert. “How did you price this policy? Where did you come up with this pricing?” are critical questions to ask, he said. Pooling arrangements designed to provide risk distribution also require careful oversight. Pools can work, but they should operate as genuine insurance arrangements, with actual risk sharing, properly written policies and claims activity, rather than simply moving matching amounts of premium among participants, he said. “You really need to pay attention into why you’re getting to this pool,” Mr. Autry said. “Understand the pool. Understand the risk that you’re taking.” Captives that elect Section 831(b) tax treatment face additional tax and reporting obligations and ongoing IRS scrutiny, Ms. Roese said. 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