November 14th - 17th, 1999
Hyatt Regency Miami, Florida

Basics of Employee Benefits for Captives Owners

John Woyke, Esq., Principal, Towers Perrin
P. Bruce Wright, Esq., Partner, LeBoeuf, Lamb, Green & MacRae

Monday, November 15th, 8:00-10:00 a.m.
 

" Employee Benefits Are Increasingly Insured Through Captives

A federal tax ruling that requires captive insurance companies to insure risks unrelated to the primary business operations of their corporate owners has sent captives searching for new risks to assume.

The incentive is that if a captive's risk portfolio includes a certain amount of unrelated business risks, the premiums the owner pays to the captive are considered tax deductible.

That ruling has motivated some companies to try to bring employee benefits into their captives, according to P. Bruce Wright, a partner in the New York-based law firm of LeBoeuf Lamb Greene & MacRae. Wright spoke Nov. 15 at the Ninth World Captive and Alternative Risk Financing Forum, held in Miami. The session was titled, "Basics of Employee Benefits for Captive Owners."

Employee benefits include group life and health, pension plans, health benefits for retirees and long-term disability benefits. Such risks are considered unrelated business because the risks are those of the employees, not the employer, Wright said.

Another reason to insure employee benefits through a captive is that it can be difficult to find coverage in the open market for some employee benefits, particularly post-retirement health benefits, said John Woyke, a principal with Towers Perrin.

Changing employment trends also are playing into this trend. For instance, an increasing number of professional expatriots may work abroad for a U.S.-based multinational corporation. These workers--often computer professionals--may move frequently from assignment to assignment and from country to country. As a result, they don't work in one country long enough to qualify for pension or social security programs, Woyke said.

A captive can help an employer provide retirement benefits for those employees without incurring severe tax consequences to the individuals, he said. For example, if the benefit program is not structured properly, an individual who has never lived or worked in the United States could be subject to federal estate taxes.

However, structuring a captive to accept employee-benefits risk is a complicated process. Often the most viable way is to work through a licensed insurer, which then cedes the risk to the corporate-owned captive. The captive then reinsures the risk. And, because of U.S. restrictions, the captives are often domiciled offshore, Woyke said.