International Treasurer — October 2005
The Internal Revenue Service recently ruled that retiree health benefits funded through a captive insurance subsidiary qualified as insurance. This was good news for companies that are increasingly looking at captives to mitigate pension risks. Many companies in the NeuGroup universe are looking to go the route of Coca-Cola, which several years ago created a Dublin-based reinsurance captive to manage pension obligations in several territories. According to broker and risk expert Marsh, which helped Coca-Cola implement its captive, the main benefits of the arrangement “are operational efficiencies derived from centralization of activities and financial management” – words embedded in most of the mandates of today’s corporate treasuries.
Still, generally speaking, the IRS takes a dim view of captives for anything else, so it makes sense to review your current terms. As International Treasurer wrote in 2005, captives make sense because they allow companies “to control the terms of their insurance policies and rationalize premium cost. But in contrast with plain self insurance, captives work when they give corporates the ability to deduct the premium paid, just like traditional insurance policies. To achieve this goal, the captive must comply with IRS guidance that defines which insurance arrangements are akin to traditional insurance, and thus eligible for deductibility.” However, well aware of the benefits of captives, the IRS is to this day is continually on the hunt for what it believes are numerous abusive arrangements; i.e., those that don’t, in fact, offer valid or “traditional” insurance.