MEDICAL ALLIED REINSURANCE COMPANY
Self-Fund Your Plan
Offset health insurance costs and stabilize year-to-year premium rates
A growing number of small and midsize employers are opting to self-insure their employee health plans; primarily due to rising health care premiums and regulations. The annual premiums for employer-sponsored family health coverage reached $18,142, with workers paying $5,277 toward their plan in 2016, according to the Kaiser Family Foundation. Large employers have utilized the self-funded model for many years now, and small to mid-size companies are beginning to realize the benefits of a self-funded plan.
Download our Executive Summary to find out how you can mitigate this risk for your clients' business.
Strategic Risk Alternatives (SRA) offers strategies to maximize the benefits and minimize the risks of Self-Funded Plans.
What is a MARC?
Our firm is of the opinion that owning a small insurance company will soon be a normal business practice. Strategic Risk Alternatives is an insurance administrator and its primary role is to ensure that its clients’ MARC’s operate in accordance with federal and state guidelines. In addition to ensuring compliance, SRA provides administrative services to the MARC that include incorporation, claims processing, annual corporate filing, and other related services.
Over time, the Self-Funded Plan allows the employer to build a tax advantaged reserve that can grow to be substantial over time. Having the reserve inside the MARC allows the employer to meet the premium increases resulting from a heavy claims year and with tax advantaged dollars.
Rite Plumbing Contractors (RPC) was founded in 1992 as an s-corporation operating out of the owner’s home. RPC began doing business primarily as a maintenance and service provider, but now generates a majority of its income from new commercial and residential construction projects. In the years since it was established it has grown to be the largest plumbing contractor in its local area. Throughout its growth, RPC has added 3 additional owners and now employs 85 staff members. From its success and profitability, the company is able to provide its employees with many benefits, including health insurance.
- RPC is a highly profitable company and is concerned about the rising cost of providing health benefits to its employees
- It has been utilizing a self-funded healthcare plan for three years and has received favorable underwriting each year
- Since implementing a self-funded plan, the company has not exceeded 75% of its expected claims and receives consistently favorable underwriting
- RPC would like a way to create a savings fund in the event of a high claims year occurring
- It would also like to increase its deductible based on its consistent favorable underwriting
Find out how the Medical Allied Reinsurance Company program helped RPC minimize their risks associated with traditional health insurance plans and put more money in their pocket.
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Businesses can now mitigate healthcare increases by building up tax-advantaged reserves for potential high claim years.
Reinsurance is insurance for insurance companies. It is the transfer of part of the hazards, or risks, that a direct writer assumes, by way of an insurance contract or legal provision on behalf of an insured, to an additional insurance company, the reinsurer, that has no direct contractual relationship with the insured.
A direct writer is an insurance company that initially underwrites the risk, and then, may transfer the insurance it has written to another insurance company or reinsurance company.
An operating company would be known as the insured. The operating company transfers its risk to the direct writer for a premium. This process is the same as the operating company transferring their risk using a general liability or worker’s compensation policy.
SRA believes each producing company has risks that are unique. This risk needs to be assessed by SRA and the owners of the operating company. Once the risk is determined, the premium would be assessed by the underwriting direct writer.
Multiple risks may be transferred to the direct writer including: professional liability, non-merchantable warranty, supply chain interruption, data breach, food borne illness, brand protection, contingent business interruption & dispute resolution. The risk must be fortuitous and not considered to be a business risk.
In order for this to be a legitimate tax deduction there must be actual risk shifting and risk distribution. SRA utilizes risk shifting through the direct writer. The risk distribution is handled in the reinsurance agreement made between the direct writer and the reinsurance company. The reinsurance company will have 50% affiliated risk under a facultative clause and 50% unaffiliated risk is shared on a pro-rata basis across all reinsurance companies which have reinsured the same risk under a treaty clause.
This deduction would be a line item 162 deduction. This deduction would be treated no differently than the premium paid on a general liability or worker’s compensation policy.
SRA relies on several IRS ruling and private letter rulings. To find more detail, visit our Tax Resources page at strategicriskalternatives.com/tax-resources.
The direct writer will cede at least 90% of the premium. The administrator of the direct writer does not charge any other fees for: ceding premium, handling claims, handling loan documents, or any other quarterly processing requirements.
The administrator of the direct writer charges $5,000 to form a reinsurance company. This charge will go toward the chartering fees and legal documents for the formation of the reinsurance company. Stock certificates will be provided for the individuals or entities that will own the reinsurance company. The filing for the reinsurance company will be handled by the administrator of the direct writer as well. The ongoing fees to maintain a reinsurance company are typically $5,000 annually; this fee is paid to the administrator of the direct writer. Out of that fee the reinsurance company’s annual charter renewal fees are paid, and an 1120PC tax return is completed.
To take advantage of owning a reinsurance company the minimum premium that would need to be ceded into the reinsurance company is $80,000 annually. The maximum you can cede into a reinsurance company, for tax purposes, is limited to $2.2 million annually. The premium ceded into the reinsurance company has to be appropriate for the amount of risk being insured.
The reinsurance company is structured as a C-Corp and is domiciled in the Modoc Tribe’s sovereign reservation land in the state of Oklahoma. The administrator applies for the C-Corp’s Employer Identification Number and is subject to U.S. federal taxation. It files a U.S. Federal 1120PC tax return.
The IRS Code Section 831-B effectively allows a small casualty insurance company to receive up to $2.2 million per year in premiums without paying income taxes on the ceded premium. Taxes are only paid when the profits are distributed to shareholders. Under this structure the significant advantage is that a reinsurance company is able to accumulate a surplus from underwriting profits whereas non-insurance entities must pay tax in the year it receives the income.
Underwriting profit is exclusive to the insurance industry. Underwriting profit consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on the held premiums. Investment income from the premium reserves will be taxed at C-Corp tax rates.
Access to reserves can occur in three ways:
- Declare a dividend, and distribute the reserve at a reduced tax rate.
- Upon liquidation, distribution may be taxed as a long term capital gain, reduced tax rate.
- Make loans to shareholders. No tax event occurs, but the note must be a performing loan and be documented under a loan agreement