IRS Rules Captive Reinsurance Arrangement Involving Retiree Medical Benefits Qualifies as Insurance for Federal Tax Purposes

On May 18, 2014, the Internal Revenue Service (IRS) ruled that an employer’s wholly owned captive insurance subsidiary could reinsure the employer’s retiree medical benefit risks and still qualify as insurance for federal tax purposes, even though the retiree medical reinsurance policy was the only business of the captive.  The IRS held that the insured risks were those of the retirees and their dependents, not of the employer or the employer’s voluntary employee benefit association that purchased the insurance policy reinsured through the captive.  The ruling will serve as guidance for employers seeking to structure and implement similar captive reinsurance arrangements that are eligible for favorable federal tax treatment.


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