The world of health insurance is a complicated, often frustrating place. Many companies are interested in offering better, more affordable plans for their employees, but most plans are very similar. The cost of health insurance is prohibitive, the benefits limited, and copays, deductibles, and co-insurance expensive. However, one option to explore is captive insurance.
What is Captive Insurance?
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Captive insurance has actually been around since the 1950s. In recent years it has made a comeback as the system we are currently using doesn't always work well. Understanding how captive insurance works is an essential part of offering it to your employees.
Captive insurance is an organization whose only purpose is to insure its owners or members. It is funded by capital from the company and contributions from its members. A captive insurance program can cover all of your employee's benefits and general business insurance that your company needs. To put it simply, captive insurance is a form of being self-insured.
Pros and Cons of Captive Insurance
One of the best advantages of captive insurance is the flexibility and control it allows a company and its employees. Owners or members can choose the benefits that work best for them and eliminate coverages that aren't necessary. It is also helpful for cutting expenses as healthcare costs are fixed and not subject to the typical insurance benchmark.
Captive insurance tax benefits are another reason small to medium companies choose this type of plan. In 1986, the Internal Revenue Code (IRC) Section 831(b) was passed and stated that captive insurance premiums are 100% tax-deductible up to $1.2 million or less. The cap has increased in subsequent years and is now at $2.35 million for the year 2020.
As with everything, when there are advantages, there are disadvantages as well. The biggest con is that capital is required to fund the plan, and this money is at risk of loss. Also, a fund could, at some point, need additional capital and the owner is responsible for providing that. Multiple high claims in one year can cripple a captive insurance program.
Operating a captive insurance company presents a need for trained, experienced company personnel. You will need to hire new employees to take on these responsibilities or use high management employees to do so.
Types of Captive Insurance Plans
There are five different types of captive insurance plans. Understanding how each one works will aid in helping business owners to make a decision as to if a captive insurance program is right for you:
- Pure or single-parent is a captive insurance program that is owned and operated by one company and its branches.
- An association or group captive features several small or medium-sized companies. The point here is to pool resources and risk.
- A protected cell captive is structured so that the business' assets and liabilities are held in separate accounts which will minimize gains and losses.
- Rental captives are a plan where other businesses can opt in for temporary coverage.
- Agency captives feature an agent who reinsures a company by pairing it with a traditional carrier.
Chandler & Knowles, CPAs offers a variety of business and individual services. Our team of specialists are ready to guide you in this new endeavor. Contact us today.