Many business owners who deal with captive insurance companies or utilize one of their own may have heard of the term, “micro captive” but may not be fully aware of exactly what one is. Here is a brief and simplified explanation of just what micro captives are and what they are not.
Simply put, a micro captive insurance company is any captive insurance company which has less than $2.2 million worth of premiums per year. This was just raised in 2017 from an annual limit of $1.2 million. The new limit will be allowed to be adjusted for inflation annually going forward.
Micro captive insurance companies are afforded special income tax rules as stated under Internal Revenue Code Section 831(b). These rules would apply to all micros, including individual, group, and rented. To qualify for these special tax benefits, the company must operate just like a traditional insurance company, meaning that they must adequate risk shifting and sharing. The company must also be registered as a United States taxpayer or be an offshore entity that is considered domiciled within the United States.
Micro captive insurance quickly became very popular to utilize and operate because under 831(b) they are only taxed on their investment income, not on their underwriting income. The underwriting profit can be kept within the company coffers as a surplus or it may be distributed to shareholders in the form of dividends.
The only major caveat to be considered when starting a micro captive is that the annual premiums are calculated by the gross amount instead of the net amount. The gross premium being calculated may be in the form of an assumed premium or a direct written premium. Either is considered acceptable in the eyes of the law.