Employee Benefits in a Captive

Employee Benefits has been an area of significant interest and growth for captives over the past decade. Our Employee Benefits practice has been actively engaged in creating innovative ways to utilize captives for employee benefits since the original Prohibited Transaction Exemption was issued in 2000.

There is increasing interest in the use of captives to fund employee benefits. Group Health Insurance (primarily stop loss), Group Life Insurance, Group Disability Insurance as well as Retiree Health Coverage & Pension Risk are coverages commonly considered for  a captive arrangement. The use of captives to fund employer stop loss has been gaining momentum for several years, and with the Department of Labor’s (DOL) recent return to a favorable outlook on ERISA* plans and the reinstatement of the Expedited Process  (EXPRO), significant interest and activity has reemerged regarding most employee benefit plans.

Our experience with employee benefits being placed in a captive began in 1999 when MSW began to design and implement the landmark Prohibited Transaction Exemption 2000-48 for a client. That experience continues today as we actively manage this original captive and evaluate new & innovative ways to utilize captives to fund employee benefits.

Employee Benefits Captive Experience

In 2000, MSW along with other strategic partners paved the way for the use of captives to fund employee benefits by working with the appropriate regulatory bodies to issue a captive exemption for one of our clients. MSW sought an individual exemption that would allow our client to reinsure their Group Long Term Disability plan with a single parent, Bermuda-based captive. This exemption was unique for the time in that utilizing a captive to fund employee benefits had long been considered a prohibited transaction by ERISA due to the related party issue.

  • 2000: Approval from DOL – allowed an employer to use a captive for employee benefits with less than 50% unrelated risk** in the captive.
  • Additional outcomes – employee benefits could be classified as unrelated third party business, strengthening the case for tax advantages otherwise unavailable to the captive.
  • Triggered “EXPRO” – eliminated the arduous and costly process experienced by the initial applicants

McGriff, Seibels & Williams, Inc. Today

MSW continues to manage the original captive that started this movement which provides our practice with a unique knowledge no other consultant or broker can claim. How this captive has operated and continues to operate successfully allows us to have a significant knowledge of the many issues confronting captive management in employee benefit arrangements.

Our analysis of the advantages of utilizing a captive in the manner described above includes several processes including a clear & concise feasibility study prepared in conjunction with our actuaries & captive manager. 

It is of extreme importance to recognize that many departments within a company must be genuinely committed to this venture and intimately involved in the process.    

We are very excited about the future of the captive environment for employee benefits and are currently analyzing several new avenues to use the advantages gained by third party business.

*ERISA - is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans

**The 50% requirement is a significant hurdle since most captives try to avoid exposing risk capital to significant third-party, unrelated risk