Pub. 4 2016 Issue 3

Issue 3. 2016 17 insurance companies to insure these currently unfunded risks. Through the incentive, banks can form their own captive insurance companies and then make an election under Section 831(b) of the Internal Revenue Code. This allows companies to pre-fund for potential future risks on a tax advantaged basis, provide an incentive to set money aside for future potential claims and create a mechanism for companies to formalize their current self-insurance program. In the December 2015 Appropriation Bill, Congress moved the annual allowable premium limit from $1.2 million to $2.2 million for the tax years after 2016. Financial institu- tions with larger baskets of unfunded risks will be able to continue to grow their captive over time as the institution grows organically or with acquisitions and the small busi- ness incentive will also grow. The potential savings related to this small business subsidy (Section 831b) for captives varies from bank to bank, but they can be significant. In some cases, holding companies can see an increase to earnings per share of 3-5%. Of course, this solution is not a fit for every bank. This solution should only be implemented by banks with sufficient capital and earnings. Holding companies that want to form a captive must be well managed and well capitalized and their affiliated bank that pays premiums into their captive must have sufficient capital and earnings to support the additional insurance expense at the bank level. Captive insurance companies are a growing trend for high performing banks throughout the country. As banks be- come more aware of their unfunded risks through ongoing enterprise risk management, the captive offers a unique and customized approach to identify and fund for those risks on an annual basis. And, the significant small business incen- tive provided under Section 831(b) of the tax code provides further motivation to implement the structure. n Banks with an interest in exploring whether a captive insurance company is a good fit for their institution should contact Josh Miller at jmiller@key-state.com or Howard Headlee at howard@uba.org. Currently over 24 state banking associations throughout the country have endorsed bank captive programs for their members.