Skip Navigation Links.
Collapse IRMI OnlineIRMI Online
Expand How To Use IRMI OnlineHow To Use IRMI Online
My Paid Publications
Expand What's NewWhat's New
Expand DashboardsDashboards
Expand Commercial Liability InformationCommercial Liability Information
Expand Commercial Property InformationCommercial Property Information
Expand Commercial Auto InformationCommercial Auto Information
Expand D&O, PL, E&O, EPLI InformationD&O, PL, E&O, EPLI Information
Expand Workers Compensation InformationWorkers Compensation Information
Classifications and Cross-References
Expand Risk Mgt. and Multiline InformationRisk Mgt. and Multiline Information
Collapse Risk Finance InformationRisk Finance Information
Collapse Free Risk Finance CommentaryFree Risk Finance Commentary
Collapse CaptivesCaptives
Captive Profits without Third-Party Business(April 2015)
Captive Stories: The Genesis of Risk Shifting and Risk Distribution (January 2015)
What Is Controlled, Unaffiliated, Insurance Business in a Captive? (October 2014)
Captives: Renting versus Owning (July 2014)
Captive Information on the Internet (January 2014)
Defending the Need for Captives to the IRS (January 2014)
Captives: A Shadow Insurance Industry? (July 2013)
Time To Review Domiciles (May 2013)
Searching for the GUT Value of a Captive (November 2012)
Captive Loan-Backs versus Corporate Receivables (October 2012)
Year-End Captive Advice (October 2012)
Captive Domiciles—Everybody on the Bandwagon! (September 2012)
Captives and Life Insurance (July 2012)
The NRRA's Effect on Captives (May 2012)
Employee Benefits in Captives: An Update (April 2012)
Medical Stop-Loss Group Captives (February 2012)
The Use of Captives in Wealth Management (January 2012)
Surplus Lines Insurance Taxation Remains Murky (October 2011)
Insurance Captives on Shifting Sands (July 2011)
Captive Domicile Selection Issues (April 2011)
A Cautionary Tale about Captive Risk Distribution (February 2011)
Stay Tuned into Your Captive Regulators (January 2011)
Evaluating Your Captive’s Capital and Surplus Requirements (December 2010)
Captive Managers—The Basics (October 2010)
Property Insurance Captives—A Funding Primer (August 2010)
Captives and Employee Benefits (July 2010)
Direct Procurement Revisited (April 2010)
Captive Underwriting Profits—without Third-Party Business (February 2010)
What Is Insurance, and Does a Captive Qualify? (January 2010)
The Captive/Large Deductible Debate—A Philosophical Perspective (December 2009)
Claims and the Captive (October 2009)
Do Captives Earn Profits? (August 2009)
Agency Captives Revisited (July 2009)
The Economic Bailout and Its Unintended Consequences (April 2009)
Captive Guideposts for 2009 (January 2009)
Things To Know about Captive Insurance Companies (November 2008)
Taxes and Insurance Captives (October 2008)
Captives: Domicile Shopping (August 2008)
Federal Proposals for Captive Insurance Regulation (April 2008)
Redomiciling Your Captive Insurer (February 2008)
Captive Insurance Exit Strategy (November 2007)
Captive Insurance Companies: Beware of New Treasury Proposal (October 2007)
Captives and Collateral (August 2007)
Windstorm Captives (April 2007)
Captives in Review (February 2007)
Captives and Corporate Governance (October 2006)
Insuring Property Risks in a Captive (October 2006)
Why You Should Start a Captive in a Soft Market (August 2006)
How To Choose a Domicile That Works Best for Your Captive (April 2006)
Investment Strategies for Captives (January 2006)
What Is Insurance? Where Are the Rules? (October 2005)
Regulation of Captives: Who? Why? What Next? (August 2005)
When Is Reinsurance Not Reinsurance? (April 2005)
Using Captives and Risk Retention Groups Together (January 2005)
Taking a Closer Look at Captive Costs (October 2004)
Some Cautionary Thoughts on Healthcare RRGs (August 2004)
Medical Malpractice and Alternative Risk (April 2004)
What's in Store for 2004 for Alternative Risk? (January 2004)
Risk Retention Group Formations Increase (October 2003)
The Role of the Domicile Manager (August 2003)
The "Fronting" Wars Continue (April 2003)
Captives, the Terrorism Risk Insurance Act, and the Market (January 2003)
Actuarial Projections and the Captive (November 2002)
Choosing the Right Captive Domicile (August 2002)
Captive Structures (April 2002)
Captives 101: What Are They, and Why Do I Want One? (January 2002)
Expand Quantitative MethodsQuantitative Methods
Expand Risk FinanceRisk Finance
Expand Construction InformationConstruction Information
Expand Personal Lines InformationPersonal Lines Information
Expand Claims, Caselaw, LegalClaims, Caselaw, Legal
Expand Insurance IndustryInsurance Industry
Expand Glossary of Insurance & Risk Management TermsGlossary of Insurance & Risk Management Terms
Expand SearchSearch
Terms of Use
Privacy Statement
System Requirements

Captives and Employee Benefits

July 2010

With the passage of the Affordable Care Act this spring, many more firms are inquiring about the possibility of using a captive to finance their healthcare programs. In this article, I will offer some thoughts on that matter.

by Michael R. Mead
M.R. Mead & Company, LLC

Offering healthcare payments to employees is a costly proposition. Once offered, it is assured to be accepted, so claims are guaranteed. Paying for those claims becomes the challenge. Until now, the payment to any employees who have any connection to funds subject to regulation by the U.S. Department of Labor under Employee Retirement Income Security Act (ERISA) rules required a lengthy and expensive process for approval in order to use a captive.

Some employers have used Multi-Employer Welfare Associations (MEWAs) and association and group captives to offer coverage. Some have offered reduced coverage known as mini-meds. All of these structures are now questionable as to whether or not they will be allowed.

As with so much else in the wake of healthcare reform, the old rules are out the window. Probably. The central issue now is clarity, and there is none. Over 50,000 pages of regulations are yet to be written. The people required to write the regulations have yet to be hired and trained.

Some large firms can elect to keep their existing programs, "grandfathering." However, the rules governing the maintaining of that election are very restrictive, and some firms will not be able to keep their plans.

The Role of Captives

A central thought is that whenever there is uncertainty, there is opportunity, and those who jump at opportunity often want maximum control of their situations. That means a captive.

Captives have been used successfully in writing the stop-loss coverage over self-insured programs and that appears to remain a valid option. The stop-loss policy in a captive can limit costs to some extent until rules are set, tested, and clarified. For instance, while there is no longer a lifetime maximum limitation of costs to be reimbursed, there remain annual limits in some cases. Go figure.

At this point, there is no specific regulation applying to captives offering health insurance. It is likely that the domicile regulator will offer some resistance principally due to the widespread lack of information. Nevertheless, a well-financed plan should gain approval. As always, care will be required.

Some requirements will be the addition of children under the age of 26. There is discussion as to whether this means through age 25, or through age 26. There is also a question as to whether or not it includes a spouse, but it is clear that the "child" need not reside in the home of the parents. At this time, it does not apply to the children of the covered child.

There are also no longer any preexisting conditions that can be excluded, including some which were allowed under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Several actuaries have opined that, from a numerical and statistical standpoint, such elimination does not materially add to cost. Of course, in specific situations it could well add to cost.

Most requirements, such as individuals buying coverage and firms being subject to "play or pay" mandates, do not take effect until 2014. This is not as far away as it might seem to be, but it does allow some time to plan. By using a captive there is a good probability that the coverage can be offered in multiple states as long as licensing laws are followed. Further, by using a captive, it is possible to include coverage that is not clearly required now but may be required later. There is risk in this approach, and that risk must be weighed against offering coverage as a competitive advantage to acquire and maintain excellent staff.

As of now, an individual will be required to "buy" "minimum essential coverage," and in 2011, no restrictions can be placed on "essential health benefits." It is important to note that there are no definitions of those two terms. This is a huge uncertainty in which a captive may be used to plug that exposure. If the captive is excess of a self-insured plan, and serves to fill holes, plug gaps, remove regulatory uncertainty, and provide some manner of financial planning, there is a good chance at this time that it will be very useful.

Some insured plans have provided benefits to highly compensated employees that are addressed under IRS Section 105 (h). These nondiscrimination rules now apply to self-insured plans and can have devastating tax consequences for the covered highly compensated employees.

Clearly, with all of this uncertainty, it is difficult to plan and to finance. Nonetheless, it is upon us and every employer to address the situation. It will take careful planning, knowledgeable partners, and lots of financial resources—but a captive may well be the solution you seek.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

More Risk Finance and Captives Information from IRMI
Books, Manuals, Newsletters IRMI
Risk Financing IRMI Online ReferenceConnect
Captive Insurance Company Reports IRMI Online ReferenceConnect
Captive Practices and Procedures IRMI Online ReferenceConnect
Captives and the Management of Risk IRMI Online ReferenceConnect
The Risk Report IRMI Online ReferenceConnect
Free Risk Financing Articles in
25 Risk-Conquering Ideas
Risk Finance
Captive Insurance
Additional Insured Insurance Law
Insurance Continuing Education Courses from IRMI
Ethics Considerations for P&C Insurance Professionals (CE)
Ethics in the P&C Insurance Workplace (CE)
© 2000-2015 International Risk Management Institute, Inc. (IRMI). All rights reserved.