The Internal Revenue Service (“IRS”) has announced an increase in the annual premium limit for captives electing under Section 831(b) of the Internal Revenue Code. Effective for taxable years beginning in 2025, the limit will rise to $2.85 million, reflecting adjustments for inflation.
Section 831(b) allows qualifying small insurance companies, often referred to as “micro-captives,” to be taxed solely on their investment income, excluding underwriting profits from taxable income. This tax treatment has made the 831(b) election an attractive option for small insurers seeking efficient risk management and tax planning strategies.
The IRS’s annual inflation adjustments ensure that the premium limits for 831(b) captives remain aligned with economic changes. The increase to $2.85 million marks a continued effort to maintain the relevance and effectiveness of this provision for small insurance companies.
Alongside the premium limit increase, new regulations issued in January 2025 clarify compliance requirements for 831(b) captives. The IRS has introduced loss ratio thresholds to classify transactions: captives with loss ratios under 30% may be designated as listed transactions, while those between 30% and 60% could be considered transactions of interest. Additionally, new rules restrict financing arrangements that allow captives to make capital available to related parties. These changes reinforce the importance of structuring captives with a primary focus on genuine risk management rather than financial or tax advantages.
Small insurance companies considering or currently utilizing the 831(b) election should review their captive structures in light of the increased premium limit and evolving regulatory landscape.
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