In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) passed and increased the previous premium limitation from $1.2 million to $2.2 million—beginning after 2016. It also added an annual adjustment for inflation to the premium limitation. As a part of the inflation adjustments for 2018, the IRS increased the 2018 premium limitation (which is based on the greater of net written premiums or direct written premiums) to $2.3 million.

Annual Inflation Adjustment Calculation

The annual inflation adjustment occurs in increments of $50,000. If the calculated adjustment amount is not a multiple of $50,000, then it rounds to the next lowest multiple of $50,000.

Diversification Requirements for Section 831(b) Eligibility

The PATH Act was also responsible for the diversification requirements for Section 831(b) eligibility. As you may recall, the diversification requirements now require:

  • no more than 20% of the greater of net written or gross written premiums be attributable to any one policyholder—including controlled group policyholders); or
  • if a captive does not pass this test, no spouse or lineal descendant owns more of the captive than that person owns in the insured.

Note: These requirements were presumably added to prohibit 831(b) captives from being used as vehicles for transfer of wealth.

Guidance for “Micro-Captives”

Additionally, “micro-captives” that have made the Section 831(b) election—and their related parties—should continue to file Form 8886 annually with their tax returns. If this year is an initial filing of Form 8886, then a duplicate copy must also be filed with the Office of Tax Shelter Analysis.

The CRI team is ready to answer your questions on these captive updates—contact us today!