#ACIInsurance ACI's 3 rd Advanced Forum on Captive Insurance Steven Bauman Head of Captive Services Zurich Employee Benefit Issues: How Captives Are Used to Insure Employee Benefits How the IRS Views Medical Stop Loss How Feasible of an Option Medical Stop Loss is for Small and Middle Market Peter J. Bandarenko Head of New Market Development / Sr. Consultant Spring Consulting Group, LLC April 23 - 24, 2015 Brian T. Casey Partner, Co-Chair of Regulatory & Transactional Insurance Practice Group Locke Lord LLP William R. Pauls Partner, Tax Group Sutherland Asbill & Brennan LLP Tweeting about this conference?
Transcript
#ACIInsurance
ACI's 3rd Advanced Forum on Captive Insurance
Steven Bauman
Head of Captive Services
Zurich
Employee Benefit Issues: How Captives Are Used to Insure Employee BenefitsHow the IRS Views Medical Stop LossHow Feasible of an Option Medical Stop Loss is for Small and Middle Market
Peter J. Bandarenko
Head of New Market Development / Sr. Consultant
Spring Consulting Group, LLC
April 23-24, 2015
Brian T. Casey
Partner, Co-Chair of Regulatory &
Transactional Insurance Practice Group
Locke Lord LLP
William R. Pauls
Partner, Tax Group
Sutherland Asbill & Brennan LLP
Tweeting about this conference?
#ACIInsurance
Today's Agenda
• Why Fund Employee Benefits in a Captive?
• Medical Stop Loss Considerations
• Multinational Benefits in Captives
• ERISA Benefits in a Captive—How To Gain DoL Approval To Do It
• U.S. Federal Income Tax Considerations Associated with Employee Benefit Captives
2
#ACIInsurance
Why Fund Employee Benefits in Captives?
3
#ACIInsurance
Overview• Faced with escalating costs, many organizations are now
considering funding employee benefits through a captive
• The process has been streamlined• Obtaining DoL approval for ERISA based benefits is moving back to Fast-Track
programs because of Coca-Cola and Intel
• The DoL regulatory assistance is more systemized
• Significant funding of non-ERISA benefits is occurring (stop loss, etc.)
• Emerging benefits turnkey structures
• Certain employee benefit coverage can be viewed as "unrelated business"• Adding unrelated business to an existing P&C captive could improve the
captive's overall financial efficiency and create additional savings
4
#ACIInsurance
1960s/ 1970s Big Corporates;Mono-line Property & Casualty.
Active medical stop loss 10% - 12% Cost of stop loss
Executive benefits
Deferred compensation
COLI
Split dollar replacement
10 + % Net cost resulting in higher yield on investments
* These are typical savings that our clients have experienced in the past; actual performance may vary
13
#ACIInsurance
Benefit Captives Have Come a Long Way
Captives were not common for benefits financing:
• Companies often perceived obstacles (e.g., reinsurance restrictions)
• Territorial restrictions (i.e., U.S. only)
• Relatively few employee benefits reinsured by captives
Limited HR familiarity with captives
Insurer reluctance
Alleged marginal economics
More people involved:
• HR, Finance and Risk agendas
• Everyone knows about it Enterprise risk financing Network restructuring and changes not
aligned with growing market Companies looking at captive solutions
as the next step in cost savings and control
What does this mean?Companies need a clearly defined strategy around the risk financing of its benefits programs
Ten Years Ago Now
14
#ACIInsurance
Medical Stop Loss Considerations
15
#ACIInsurance
What Is Medical Stop Loss Insurance?
• Used by self-insured employers
• Not a “Health Insurance Policy”
• Written as health or casualty line of insurance dependingon state insurance law’s classification
• Employees are not a party to the contract, which is usuallya contract between insurer and employer, not employer’sERISA plan
• Insurer indemnifies employer for health benefits claimsunder employers’ ERISA plan
• State mandated health insurance benefits do not apply
• Federal law does not regulate stop-loss insurance, assumingno Multi-Employer Welfare Arrangement (MEWA) 16
#ACIInsurance
ERISA and Stop Loss Insurance
• ERISA does not preempt state regulation of stop-lossinsurance
• States may regulate insurance policies issued toplans or plan sponsors, including stop-loss insurancepolicies, if the law regulates the insurance companyand the business of insurance
• American Medical Security, Inc. v. Bartlett, 111 F.3d 358(4th Cir. 1997)
• Department of Labor Technical Release No. 2014-01 (Nov.2014)
17
#ACIInsurance
NAIC Model Stop Loss Insurance Act
• Developed to limit stop-loss insurance policies with lowattachment points functionally acting like health insurancepolicies, but avoiding state mandated health benefits
• Prohibits insurers from issuing stop-loss insurance policythat has:
• Individual annual per claim incurred attachment point less than$20,000
• Small employers (50 or fewer employees) - less than greater of (1)$20,000, (2) $4,000 times number of employees or (3) 120% annualexpected claims
• Larger employers (51 or more employees) - less than 110% of annualexpected claims
• Direct coverage of health care expenses of an individual18
#ACIInsurance
NAIC Model Stop Loss Insurance Act• NAIC sought in 2012 to increase attachment points for small
employers to $60,000 per employee and $15,000 peremployee in aggregate, but it never passed out of Committee
• Very few states have adopted either the earlier version of themodel law or the updated version in its entirety; although anumber of states regulate stop loss insurance either throughexplicit regulation or “desk drawer” rules.
• DE, NY, and OR prohibit stop-loss insurance to small groups(50 employees in OR and NY, and 15 in DE)
• NC applies underwriting, rating and other small group healthinsurance requirements to stop-loss insurance issued in thesmall group market
19
#ACIInsurance
PPACA and Stop Loss• What does PPACA say about stop-loss insurance?
• Nothing
• Stop-loss insurance coexists with PPACA for both large and smallself-insured employers
• Heath insurer fee and reinsurance, risk corridor and riskadjustment programs do not apply to stop-loss insurance
• IRS, EBSA and CMS issued a request for information regarding useof stop-loss insurance, with eye on potential future regulation
• Focus was on low attachment points
• To date nothing has come of this information request20
#ACIInsurance
Patient Protection and Affordable Care Act – Employer Mandate Basics• Large Employers – 50 or more FTE Employees
• Must offer “Minimum Essential Coverage” or pay penalty if 1 employee buyshealth insurance on a health insurance exchange and receives federal subsidybecause employee’s income is between 100%-400% of federal poverty level
• If “Minimum Essential Coverage” offered, but employee’s contribution exceeds9.5% of employee’s gross income, employer pays penalty as coverage deemedunaffordable
• Spouses are not dependents, but children under 26 are
• ERISA employee welfare benefit plan
• Buys group health insurance policy to fund ERISA benefits
• Self-insures ERISA benefits with or without medical stop-loss insurance
• Effective Dates of large employer mandate
• January 1, 2015 if 100 or more employees
• January 1, 2016 if 50 to 99 employees 21
#ACIInsurance
Patient Protection and Affordable Care Act – Employer Mandate Basics
• Small Employers – 1 to 49 FTE employees
• No health insurance mandate/penalty for smallemployers
• Small employers offering essential health benefitsreceive tax credit subsidies
• Small Health Options Program (SHOP) Exchangeopened in 2015 required to offer “Essential HealthBenefits”
• Small employer market is most prone to use ofmedical stop-loss insurance
22
#ACIInsurance
PPACA's Small EmployerSelf-Inured Concerns
• Adverse selection impact on the Small HealthOptions Plan (SHOP) exchange• Small employers with healthy employee populations
would self-insure, driving small employers with unhealthyemployee populations to buy SHOP offered healthinsurance
• Examples of employee groups that seek touse stop-loss insurance because of PPACA• Labor Unions
• Professional Employer Organizations (PEO) 23
#ACIInsurance
Patient Protection and Affordable Care Act – Treatment of Labor Unions• Most unionized employees have had employer-paid health
benefits negotiated in collective bargaining agreements
• Individual employer provided
• Multi-employer provided via welfare trusts, Taft-Hartley(TH) Plans
• Unions are neither employers nor insurers and largely leftout of PPACA, but individual mandate can be satisfied viamulti-employer plans meeting minimum essentialcoverage
• IRC §4980H transition rule for 2014 allowed largeemployers contributing to multi-employer plans to avoidemployer mandate penalty
24
#ACIInsurance
Patient Protection and Affordable Care Act – Treatment of PEOs
• Before PPACA, PEO treated as co-employer forpurposes of both health insurance and workers’compensation laws
• After PPACA, PEO is not treated as employer forpurpose of health benefits
• Effectively shut down PEO’s ability to provide healthinsurance to larger employer customers
• Presents Multi-Employer Welfare Arrangement(MEWA) challenges for aggregating health insurancerisks of small employer customers 25
#ACIInsurance
Captive Stop Loss Insurance• Generally, most state captive insurance laws permit captive
insurers to issue stop-loss insurance
• Limited in states like DE, NY and OR that prohibit stop-lossinsurance generally
• Employers with principal place of business or other significantbusiness office outside of these states should be able to buy stop-loss insurance even though they have employees located in thesestates
• Do state stop-loss insurance minimum attachment pointsapply to captive stop-loss insurance?
• If NRRA, or state law (see IL), makes a captive insurer asurplus lines insurer, is stop-loss insurance a prohibited lineof insurance, especially in those states where it isconsidered a line of health insurance?
26
#ACIInsurance
Stop Loss = No DoL Approval
• Generally if an employer wants to insure employeebenefits through a captive, an entity must obtainapproval from the Federal Department of Labor
• This was previously a very tedious process
• Fast-Track approval has returned with DoL approval of captivebenefits funding applications for Intel and Coca-Cola
• However, still a very time-consuming (nearly three months onaverage) and costly process
• Stop-loss policies issued by a captive are usually notsubject to DoL approval – See DoL Advisory Opinion92-02A 27
#ACIInsurance
Sample PEO Captive Bermuda Stop Loss Transaction
28Reinsurance Company
Professional Employer Organization
(PEO)
PEOEmployer Customer
PEOEmployer Customer
PEOEmployer Customer
Voluntary Employee
Benefit Association
(VEBA)
Voluntary Employee
Benefit Association
(VEBA)
Voluntary Employee
Benefit Association
(VEBA)
Medical Stop-Loss Insurance Policy
BermudaPurchasing
Trust
Bermuda CaptiveInsurer
Reinsurance Agreement
PEOPEO
Employer Customers
$ Premiums
Claims $
Trust
Co
ntrib
utio
ns
Cla
ims
$
#ACIInsurance
Medical Stop Loss Growth• According to a recent CICA survey captive utilization for
medical stop loss is likely to show double digit growth over the next three years
• More turnkey solutions
• Typically not ERISA plans (DoL Advisory Opinion 92-02A)
Medical Stop Loss growth
Already in captive
Likely in 3 years
Possibly in 3 years
13%
9%
19%
29
#ACIInsurance
What Is Driving Interest in Stop Loss Captives?• Natural to extend existing Property and Casualty (P&C)
captives to include accident and health coverage
• Potential improvement of efficiency for existing captives
• Multiple Employer Welfare Arrangement (MEWAs) and other group stop loss structures are prohibited or require more capitalization
• Heterogeneous entities can pool coverage
• Coverage funded in a cost effective manner
• Stop loss is priced conservatively
30
#ACIInsurance
PPACA Impact on Health Insurance Programs• Self funding will result in the plan saving on the taxes
below
Health Insurance Tax (HIT)
Begins in 2014Fee on all insured plansIncludes dental/vision2%-2.5% initially3%-4% of premium increasing in future yearsPermanentInsured: Built inASO: Not applicable
31
#ACIInsurance
Group Captive Health Insurance Risk Structure
Reinsurer (excess of 125% of expected Captive claims)
Captive (excess of 125% of member expected SIR)
Member SIR (e.g. $150k per member, up to 125% of expected)
Captive(e.g. Next $350k per member)
Reinsurer (Excess
$500k per member)
SPECIFIC RISK
AG
GR
EGA
TE R
ISK
Captive stop loss saves 5% to 15%
Each member is
individually underwritten
32
#ACIInsurance
Multinational Benefits in Captives
33
#ACIInsurance
Single-Parent Captive Program
Reinsurance Captive
(Owned by Customers)
Retrocessionaire(s)(Reinsurance Market)
FrontingInsurer Zurich
Insurance
Dividends Payments
Reinsurance & Collateral
Retrocession
Capitalization
ClaimsCorporate Customer(Insured)
International and domestic policies
Non-Life International
Program
Life Employee Benefits pooled En
d-to
-End
Insu
rance / R
einsu
rance
34
#ACIInsurance
Typical Network Structure Example: Transfer of Risk and Premium
Subsidiary SubsidiarySubsidiary
Global Network Partner (Reinsurer)
Local Insurer
Network Partner
Premiums Claims Premiums ClaimsPremiums Claims
Local Insurer
Network Partner
Local Insurer
Network Partner
Quarterly Claims Reimbursement
Net Premium
Home Office
SingaporeUnited KingdomFrance
35
#ACIInsurance
Multinational Pooling
Without Multinational Pooling
Claims
Commission, Taxes
Expenses and Risk/Profit
With Multinational Pooling
Claims
Commission, Taxes
Expenses and Risk/Profit
International Profit Sharing
…returned to the Client and/or the Captive
Programs Typically Considered for Inclusion:Group Life InsuranceDisability InsuranceAccidentHealth Insurance
Pension Medical Stop Loss Expats
36
#ACIInsurance
Network Structure Example:Captive Transfer of Risk and Premium
Subsidiary
Global Network Partner (Reinsurer)
Captive (Retrocessionaire)
Local Insurer
Network Partner
Premiums Claims
Quarterly Claims Reimbursement
Annual Net PremiumQuarterly Claims Reimbursement
Net Premium
Home Office
SingaporeUnited KingdomFrance
Reinsurer
Subsidiary Subsidiary
PremiumsPremiums Claims Claims
Local Insurer
Network Partner
Local Insurer
Network Partner
Captive is potentially final risk taker
Reinsurers 100 % less ceding commission
100 % Ceded Less ceding commission
37
#ACIInsurance
Types of Multinational Captive Programs • Passive Agreement
• Captive is contract holder for the pooling contract
• Captive receives the multinational dividend
• Captive Risk Retention
• Certain level of risk charges and risk in the pool
• Directly writes up to 100% of the loss below a retention level or reinsure to cap the loss at a specific dollar amount
• Retains the underwriting profit
• Treaty Reinsurance
• Partners with an insurance carrier
• Responsible for claims payment and additional administrative tasks
• Retains the risk charge, taking premiums, risk and reserves, and transfers them back to the captive which may include a large deductible structure - improves cash flow
Can enter into an arrangement with and without reinsurance as a percentage (%) above the expected claim level and with
catastrophic reinsurance with multiple event triggers
38
#ACIInsurance
ERISA Benefits in a Captive—How To Gain DoL Approval To Do It
39
#ACIInsurance
Why Is the Department of Labor Involved?• Companies interested in funding employee benefits in a
related insurance company may constitute a prohibited transaction between a party in interest (the captive) and the plan
• ERISA describes a party in interest (ERISA §406) for captive insurance companies• Employers are "parties in interest" if 50% or more of the captive's
premiums are related to the parent
• Direct or indirect furnishing of services between a plan and "party in interest" is prohibited unless you receive a DoL exemption
40
#ACIInsurance
DoL's Position on Funding Employee Benefits Through Captives
• The DoL permits exemptions to prohibited transactions
• Statutory exemption – 5% exemption for commercial insurers who insure own benefits
• No DoL approval required
• Class exemptions – applies to broad range of transactions
• Prohibited Transaction Exemption (PTE 79-41) – 50% of the captive's business must be with parties unrelated to the employer
• If a captive satisfies this 50% test, the captive can be used to fund directly written employee benefits without the DoL's approval
• Individual exemptions – applies to particular applicant's case and requires DoL review and approval
• Prior to 2012, exemption applications could qualify for the DoL's EXPRO process, also known as "fast track"
41
#ACIInsurance
What Is EXPRO?• PTE 96-62 allowed applicants, to apply for an expedited
process so long as they could point to either:• 2 substantially similar transactions subject to individual exemptions within a 5
year period, or
• 1 substantially similar individual exemption within 10 years and one substantially similar transaction authorized via EXPRO within 5 years
• Under EXPRO, the approval process took about 78 days or half the time it would take an individual exemption to be approved
• With its shorter turnaround time, EXPRO became a popular process and most of the ERISA applications followed this process
Not all benefits captive transactions are subject to DoL approval
42
#ACIInsurance
EXPRO Under Review
• In 2012, the DoL announced that it would be reviewing the EXPRO criteria and that going forward, applicants would need to follow the individual exemption process
• The review coincided with the sunsetting of the base exemptions used to fulfill the "substantially similar" exemption requirement
• As a result of the review, the number of PTE applications decreased until two new cases – Coca-Cola and Intel –came forward
43
#ACIInsurance
What Is the DoL Focused On?• In addition to pointing to substantially similar exemption,
applicants were also required to show that:• The Plan would pay no more than adequate consideration for insurance
contracts
• No commissions would be paid by the Plan with respect to direct sale of contracts or the reinsurance thereof
• In the initial year, there would be immediate and objectively determined benefits to the plan's participants and beneficiaries (enhanced benefits)
• In subsequent years, the formula used to calculate premiums would be similar to formulae used by other insurers
• The Plan would only contract with insurer(s) with a rating of A- or better from A.M. Best Company, or another equivalent rating from another rating agency
• An Independent Fiduciary analyzed the transaction and rendered an opinion that the requirements above had been fulfilled
The DoL is focusing in detail on these areas
44
#ACIInsurance
The Return of EXPRO?• In March 2013, the DoL approved Coca-Cola's individual
exemption, allowing the reinsurance of Coca-Cola's Life and AD&D policies in its South Carolina captive
• On April 10, 2014, the DoL approved Intel's individual exemption, allowing Intel to reinsure its Life and AD&D policies in its Hawaii captive
45
#ACIInsurance
DoL Instructions• The DoL has instructed employers seeking captive
benefits funding arrangements to review the criteria met by Coca-Cola and Intel• PTE 2013-03 (Coca-Cola)
• PTE 2014-03 (Intel Corporation)
• While the criteria has not changed, the focus on certain regulatory issues has changed• The DoL is taking a closer look at benefits enhancement to ensure that
such enhancements are long-lasting and truly benefitting plan participants
• Accelerated Death Benefits
• Increased guaranteed issue
• Increase multiple of salary for optional life 46
#ACIInsurance
Anticipated Project Timeline
Ind. Fiduciary Review
In Depth Actuarial / Financial Modeling
High Level Review
Program Design / Benefit Enhancements
Go Live
ONGOING PROJECT MANAGEMENT & LEGAL COUNSEL
Approval
Submission Development
Fronting Carrier request for proposal (RFP) /
Existing Carrier Negotiations
47
#ACIInsurance
Going Forward…
• Intel's PTE approval, combined with Coca-Cola's PTE may
usher in a new wave of funding employee benefits in a
captive
• In the past, applicants were required to point to two
substantially similar PTEs and now the employee benefits
world has the Coca-Cola and Intel PTEs to lead the way
Insurance Company Status• For purposes of Subchapter L, the term "insurance company"
means any company more than half of the business of which during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies (see IRC §§816(a), 831(c))
• Whether more than half of the company's business constitutes the issuance of insurance or annuity contracts or the reinsurance of risks underwritten by insurance companies depends on the facts and circumstances of each situation
• Accordingly, it is the character of the business actually done during the taxable year that determines whether a company is taxable as an insurance company
• Note: The determination of the company's status as an insurance company must be performed annually
• The determination of whether an arrangement constitutes "insurance" for U.S. federal income tax purposes typically involves an analysis of the following requirements:
• Does the arrangement involve insurance risk, not merely investment risk or business risk?
• Does the arrangement provide both risk shifting and risk distribution?
• Does the arrangement constitute insurance "in the commonly accepted sense"?
• See AMERCO v. Commissioner, 96 T.C. 18 (1991), aff'd, 979 F.2d 162 (9th Cir. 1992); Rev. Rul. 2002-90
• In Rev. Rul. 2002-89, the IRS considered two situations in which a wholly owned captive insured the professional liability risks of its parent company, either directly or through reinsurance, as well as similar risks of unrelated parties
• In Situation 1, the premiums paid by the parent company to the captive, and the risks assumed by the captive from the parent company, constituted 90% of the captive's total premiums earned and risks borne for the taxable year
• In Situation 2, the premiums paid by the parent company to the captive, and the risks assumed by the captive from the parent company, constituted less than 50% of the captive's total premiums earned and risks borne for the taxable year 54
• Situation 1: The IRS concluded that the arrangement between the parent company and the captive did notconstitute insurance for U.S. federal income tax purposes
• The IRS reasoned that the requisite risk shifting and risk distribution were not present because too large a portion of the captive's premiums and risks were from the parent company
• Situation 2: In contrast to Situation 1, the IRS concluded that the arrangement between the parent company and the captive in Situation 2 constituted insurance for U.S. federal income tax purposes
• Rev. Rul. 2002-89 delineates the following thresholds with respect to the effect of a captive's risk profile on the determination of whether the captive's coverage of the risks of its parent company constitutes insurance for U.S. federal income tax purposes:
• 90% parent company risk / 10% unrelated-party risk –These facts may preclude the arrangement from being treated as insurance for U.S. federal income tax purposes
• Less than 50% parent company risk / greater than 50% unrelated-party risk – Although not conclusive, these facts support the conclusion that the arrangement constitutes insurance for U.S. federal income tax purposes
• Three principal authorities usually are cited for guidance on the topic of whether the employees of the parent company of a captive (or of any other affiliates of the captive) should be treated as parties that are unrelated to the captive and, correspondingly, whether the risks of those employees should be treated as unrelated-party risks
• Rev. Rul. 92-93
• Rev. Rul. 92-94
• Rev. Rul. 2014-15 (issued by the IRS in May 2014)
Rev. Rul. 92-93Facts• In Rev. Rul. 92-93, the IRS considered a situation in
which X, a domestic manufacturing corporation, obtains for each of its employees $100,000 of life insurance coverage under a nonparticipating group term life insurance contract
• The group term life insurance contract is issued to X by S1, a wholly owned insurance subsidiary of X
• S1 is engaged in the trade or business of issuing life insurance and annuity contracts to the public
• S1 is regulated as an insurance company by the states where it transacts business
Rev. Rul. 92-93Analysis• Although X purchased the group term life insurance contract from
its wholly owned insurance subsidiary S1, the IRS concluded that fact did not cause the arrangement to be "self-insurance" because "the economic risk of loss being insured . . . is not a risk of X"
• The IRS reasoned that the insurance on the employees' lives relieved them of the expense of obtaining life insurance for themselves, thus it constituted an economic benefit to the employees and, correspondingly, compensation to them
• Accordingly, X was allowed to deduct the premium paid to S1 for the group term life insurance on an employee to the extent that the aggregate amount of compensation for the employee's services did not exceed reasonable compensation for those services (cf. Rev. Rul. 56-400)
Rev. Rul. 92-93Analysis (cont'd)• Notably, the IRS stated in Rev. Rul. 92-93 that its
reasoning also applies to accident and health insurance
• Thus, an employer may deduct the premiums paid to its wholly owned insurance subsidiary for accident and health insurance on an employee, provided the aggregate amount of compensation to the employee does not exceed reasonable compensation
Rev. Rul. 92-94Facts• Rev. Rul. 92-94 involves a situation in which a
non-life insurance company, IC, is insuring its own employees
• IC charges itself an amount representing premiums for its liability to pay insurance and annuity benefits for its employees and includes that amount in gross premiums written on its annual statement
Rev. Rul. 92-94Analysis• The IRS concluded that the amounts that IC charges
itself with respect to its liability for insurance and annuity benefits for its employees must be taken into account in computing IC's gross premiums written under IRC §832(b)(4)
• The IRS also recognized that IC's assumption of this liability is not the equivalent of self-insurance "because the assumption shifts the employee's risks to the insurance company"
• Thus, the IRS concluded that deductions for the amounts that IC charged itself as premiums were not barred 64
Rev. Rul. 2014-15Facts• Rev. Rul. 2014-15 describes a situation in which a domestic
corporation, X, voluntarily provides health benefits to a large group of named retired employees and their dependents
• X makes a contribution to its single-employer voluntary employees' beneficiary association (VEBA) to provide the health benefits
• Rather than providing the health benefits to retirees and their dependents on a self-insured basis, the VEBA enters into a contract (Contract A) with an unrelated life insurance company, IC
• Under Contract A, which provides noncancellable accident and health insurance coverage, IC will reimburse the VEBA for medical claims that are incurred by the covered retirees and their dependents and paid by the VEBA
Rev. Rul. 2014-15Facts (cont'd)• In order to keep the premium payment under Contract A
affordable, IC enters into a separate indemnity reinsurance contract (Contract B) with X's wholly owned subsidiary (S1), under which S1 receives a premium and reinsures 100% of IC's liabilities under Contract A
• Contract B is S1's sole business
• IC's participation in this arrangement is a condition of an exemption from the Department of Labor (DoL) from certain of the prohibited transaction provisions of the Employee Retirement Income Security Act (ERISA)
Rev. Rul. 2014-15Facts (cont'd)• The IRS also assumed the following points of factual significance:
• S1 is regulated as an insurance company under state law;
• S1 possesses adequate capital to fulfill its obligations to IC under Contract B;
• Contract B is regulated as insurance;
• The amount of premium under Contract B is determined at arm's length in accordance with applicable insurance industry standards;
• There are no guarantees that the VEBA or X will reimburse S1 with respect to S1's obligations under Contract B;
• None of the premium received by S1 for Contract B is loaned back to the VEBA or X; and
• In all respects, the parties to the arrangement conduct themselves consistent with the standards applicable to an insurance arrangement between unrelated parties
Rev. Rul. 2014-15Analysis• The IRS focused its analysis on the question of whose risk is
being insured by S1 – specifically, X, the VEBA, or the covered retirees and their dependents
• The IRS reasoned that the risks being indemnified by S1 are the covered retirees' and their dependents' risks of incurring medical expenses during retirement due to accident and health contingencies and, thus, are unrelated-party risks
• Accordingly, the IRS concluded that Contract B constitutes insurance for U.S. federal income tax purposes and, because Contract B is more than half of the business done by S1 during the taxable year, S1 qualifies as an insurance company under Subchapter L for the taxable year 69
Rev. Rul. 2014-15Analysis (cont'd)• Based on its analysis in Rev. Rul. 2014-15, it appears that
the IRS viewed the following facts as determinative:
• Although the VEBA entered into Contract A, the covered retirees' health insurance is an economic benefit to the retirees because it relieves them of the expense of buying health insurance for themselves and their dependents
• At the time that Contract A goes into effect, neither X nor the VEBA has any obligation to offer health benefits to the covered retirees and their dependents
• Both X and the VEBA may cancel the health benefits coverage at any time 70
• Rev. Rul. 2014-15 confirms the continuing vitality of Rev. Rul. 92-93 and the notion that the employees of the parent company of a captive (or of any other affiliates of the captive) should not be viewed as parties that are related to the captive and, correspondingly, that the risks of those employees should be treated as unrelated-party risks for purposes of the insurance analysis
• Rev. Rul. 2014-15 does not speak to, and otherwise does not cover, the use of a captive to insure medical stop loss coverage for its parent company's self-funded health benefits, although this topic clearly is ripe for guidance
Any tax advice contained in this document is not intended or written to be used for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code of 1986, as amended, or any other applicable tax law or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.
#ACIInsurance
About the Presenters
74
#ACIInsurance
Peter J. Bandarenko • Senior Consultant and Head of New Market Development
at Spring Consulting Group, LLC, a leading consulting andactuarial firm.
• Peter has more than 25 years of insurance industryexperience and is a recognized industry leader inemployee benefits, risk financing, captive reinsurance andnew product development. Peter has deep expertise intechnical consulting and sales, client relationshipmanagement and new product development, and has atrack record of success in both the insurance carrier andbroker/consulting fields.
• Peter works with companies and plan sponsors of all sizeson strategy, design and implementation of creativeinsurance solutions and risk financing arrangements withfocused expertise in captives, global/multinationalemployee benefits solutions, retirement benefits,voluntary benefits, executive benefits and new productdevelopment.
Steven R. BaumanSteven Bauman is currently a Senior Vice President with Zurich Global Corporate in
North America (GCiNA), located in the New York office. He is Head of Captive Servicesfor Zurich's GCiNA division. His responsibility is to help customers with captive insurerscreatively and seamlessly integrate their captives into their insurance strategies.
Over the course of his 25 year career, Mr. Bauman has coordinated business inmore than 60 countries and has personally traveled to more than 35 countriesspanning six continents. His primary areas of expertise are in corporate property andcasualty insurance and reinsurance, with an emphasis on captive programs for largenational and multinational corporations. Such captive programs integrate the use ofvarious loss retention mechanisms, risk transfer and reinsurance products for amultitude of product lines, including but not limited to: workers' compensation;general & product liability; automobile liability; property; marine; terrorism;professional liability, weather and employee benefits.
He is an active member in several professional organizations including Risk andInsurance Management Society (RIMS) New York Chapter, Captive Insurance Council ofthe District of Columbia (CIC-DC), Delaware Captive Insurance Association and theVermont Captive Insurance Association (VCIA), where he is a member of the Board ofDirectors and a member of the Legislative and Conference Committees. He oftenvolunteers his professional expertise to assist the advancement of the industry,including his current work as a member of the Board of Directors for the InternationalCenter for Captive Insurance Education (ICCIE) and his work with several U.S. stategovernments on issues related to their captive insurance company domiciles.
Mr. Bauman holds a Bachelor of Arts degree from Colgate University with majors inboth economics and political science. He holds a Masters in Management fromStevens Institute of Technology.
Brian T. CaseyBRIAN T. CASEY is a partner in the Atlanta office of
Locke Lord LLP. As co-leader of Locke Lord'sRegulatory and Transactional Insurance PracticeGroup, and a member of the Firm's Corporate,Capital Markets and Health Care Practice Groups, Mr.Casey focuses on corporate, merger & acquisition,corporate and structured finance and othertransactional, and regulatory matters for corporateclients in the insurance, financial services and healthcare industries.
One significant facet to Mr. Casey's practice is afocus on insurance-linked securities and relatedinsurance capital markets transactions. His clientsinclude insurance companies, insurance holdingcompanies, managing general agents and insuranceagencies, third party and claims administrators, banksand other financial institutions, investment banks andreinsurance companies.
William Pauls provides innovative solutions to a broad array ofcomplex federal tax issues faced by insurers, reinsurers, and othermultinational corporate clients. With more than a decade oftransactional planning experience, William regularly advises clients withrespect to structuring and implementing corporate reorganizations,stock and asset acquisitions and dispositions, cross-border transactions,spin-offs and other corporate separations, internal restructurings,reinsurance transactions, and captive insurance companyarrangements. William also offers clients critical analysis concerning theapplication of the consolidated return regulations and the resolution ofmultifaceted international tax issues, including the application of theForeign Account Tax Compliance Act (FATCA), the dual consolidated lossrules, and the insurance provisions of Subpart F.
Before joining Sutherland, William served as a law clerk for theHonorable Mary Ann Cohen of the United States Tax Court. Williamleverages this experience while representing clients before the InternalRevenue Service and in federal courts. In addition to handling federaltax controversies, William's practice before the Internal Revenue Serviceincludes obtaining letter rulings that address consolidated return issues,corporate transactional matters, and international tax questions.
