Many healthcare entities have explored certain alternative risk transfer arrangements as a means for insuring, or perhaps self-insuring, various exposures. The use of captive insurance arrangements has been a common approach, and thus, "protected cell companies" have become popular vehicles.
Most protected cell companies involve a commercial insurer that sponsors a captive insurance company. That captive has several segregated cells which are funded by business insureds to cover their own risks. These arrangements are often used by small- to mid-sized businesses that do not have the expertise or resources to establish their own captive insurance company.
The IRS has published a new Revenue Ruling (2008-8), which provides guidance with respect to tax issues pertaining to protected cell companies. Protected cell companies are insurance companies, often formed offshore, which have multiple separate cells, each of which are insulated from the credit risks of the other cells. In effect, they have multiple companies operating within a single corporate entity.
CONSISTENT VIEW
The IRS has taken a consistent view over the years that more than one insured must be involved in order for the elements of risk shifting and risk distribution to be present. For example, a captive insurance company owned by, and insuring the risks of, a single parent does not satisfy the risk shifting and distribution requirements. The new Revenue Ruling continues to follow this position, but has not answered the key question of how many insureds are enough.
In following its prior precedent, the IRS concluded that an arrangement whereby the cell provided liability coverage to its sole shareholder, and no others, did not involve risk-shifting and distribution. Thus, the arrangement did not constitute an insurance contract, and the sole shareholder was not allowed to deduct the premiums it paid to the cell.
On the other hand, if a cell is used to insure the risks of multiple affiliated entities, then the premiums paid by the affiliates would be considered insurance premiums and would be tax-deductible. The IRS concluded in that situation that risk-shifting had occurred among the affiliated entities.
The Revenue Ruling settles the question of whether the mere existence of multiple cells within the protected cell company changes the historical analysis of whether an insurance contract exists. It does not-risk shifting and distribution must still be present. While the Revenue Ruling is important in that it provides clarification on this point, it should not come as a surprise to most corporate taxpayers.
This column is written for informational purposes only and should not be construed as legal advice.
Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP in the firm's Austin, Texas, office.
Breaking Down Health Plans, HSAs, AI With Paul Fronstin of EBRI
November 19th 2024Featured in this latest episode of Tuning In to the C-Suite podcast is Paul Fronstin, director of health benefits research at EBRI, who shed light on the evolving landscape of health benefits with editors of Managed Healthcare Executive.
Listen
Patients Express Concerns Over Costs, Risks of Gene Therapies for Sickle Cell Disease
December 12th 2024Research at the annual meeting of the American Society of Hematology evaluated patient and caregiver perspectives on gene therapies for sickle cell disease, which offer great potential but have had slow uptake.
Read More
In this latest episode of Tuning In to the C-Suite podcast, Briana Contreras, an editor with MHE had the pleasure of meeting Loren McCaghy, director of consulting, health and consumer engagement and product insight at Accenture, to discuss the organization's latest report on U.S. consumers switching healthcare providers and insurance payers.
Listen