I had a conversation with a Client today about using an 831(b) captive insurance company as an addition to their partially self-funded insurance program. They presently are insuring about 250 people through their fully insured program and feel they can do better by installing a partially self-funded program.
A partially self-funded program is a method of paying for medical insurance where the company has a very high deductible policy. Often the deduction is in the range of $500,000 to $750,000 for a total stop loss deductible with individual deductibles often running to $50,000.
The reason that partially self-funded programs make sense is often companies have a very healthy employee group and the chance of running through the full amount of the deductable is something that would only happen once out of five or six years. And, that’s the problem. When that once every five or six years happens, the owner of the company will forget about the five years where they came out ahead of the game.
This is where an 831(b) captive can come into play. Because we are actually paying premiums to ourselves, there is a surplus capital pool that is being put together. For example, if the stop loss is $750,000 and the owner is paying $1,100,000 to their captive, there automatically will be a $400,000 profit in the captive. This allows two things to happen:
- There will be enough money in the captive to pay the full stop loss should that happen.
- There will be a surplus that is forming that will allow the owner to increase the amount of the stop loss and therefore decrease the cost of the stop loss insurance that has to be purchased.
There also is a third option and that is keep the stop loss where it is and just develop a surplus within the captive which can be used for other purposes in future years.
What are your thoughts about developing a partially self-funded insurance program? Do you think a captive makes sense when someone has a partially self-funded medical insurance program?