CIC Services: Congress Must Act to Protect Small Businesses from IRS Insurance Rule
CIC Services is urging Congress to take action and overturn a new IRS rule that could significantly hamper how small and mid-sized businesses manage their financial risk. The rule, finalized in January 2024, impacts IRC Section 831(b), which has provided these businesses with an affordable and efficient way to structure insurance coverage.
This regulatory change comes at a time when many businesses are already struggling with increased commercial insurance premiums, higher deductibles, and fewer coverage options. CIC Services warns that the new rule could eliminate access to vital financial risk protection for many businesses.
“Congress has a clear opportunity to act now, overturn this rule, and protect businesses from unnecessary financial hardship,” said Sean King, CEO of CIC Services.
King noted that Congress enacted the 831(b) election nearly four decades ago to provide small and mid-sized businesses with a risk management tool, and that the new IRS rule undermines that original intent.
Restrictions on IRC Section 831(b): What’s Changing?
In early 2024, the US Department of the Treasury and the IRS finalized regulations under Internal Revenue Code Section 831(b), specifically targeting micro-captive insurance arrangements. These regulations were designed to address perceived tax abuses while acknowledging the concerns of the insurance industry.
Critics of the new regulations suggest that the updated reporting requirements could create significant compliance costs for small and mid-sized businesses. They also fear that these added burdens may deter legitimate risk management practices using captive insurance solutions.
Some industry stakeholders also express concerns that the regulations may overstep federal authority, potentially infringing on areas traditionally governed by state insurance laws. A report indicates that the regulations were introduced to address the use of micro-captive insurance companies as tax shelters.
Historically, some entities have exploited Section 831(b) elections to exclude up to $2.85 million of underwriting income from federal taxation without engaging in genuine insurance activities. The IRS considers these arrangements potentially abusive, leading to increased scrutiny and regulatory actions to address the situation.
