Micro Captives vs. Group Captives: 5 Reasons Why They Are Not the Same

Federal tax form 1040 with keyboard and calculator



  • The Internal Revenue Code 831(b) establishes that qualifying captives may pay tax on investment income only and not their underwriting income if they write less than $2.4 million in premiums per year.
  • Micro captives are identified as abusive tax shelters by the IRS because they are often not formed and managed as legitimate insurance companies.
  • Group captive insurance plans from Roundstone meet all IRS criteria for a legitimate group captive insurance company.



Group captive insurance has become increasingly popular with small to midsize businesses as a cost-saving alternative to fully insured health insurance. However, it is important to note the distinction between a group captive and a micro captive as the latter has been receiving some bad press lately. Some companies have been using micro captives as inappropriate tax shelters used by companies to lower their income tax liability.


At Roundstone, our solutions utilizes a group medical captive, to allow employers to band together through pooled risk sharing so they can have the same resources and scale as a larger company when delivering health benefits to their employees. These group captives meet all IRS criteria. Read on to learn how group captives and micro captives are different.


What is a Micro Captive?


A micro captive is a small captive insurance company, typically with only one owner. While the concept behind micro captives is legitimate, micro captive companies are fast gaining a reputation for abusing the tax system and failing to follow through on providing coverage for those who are supposedly insured.


Micro captives were created to take advantage of the tax benefits of captive insurance companies laid out by Internal Revenue Code 831(b). Subsection (b) of IRC 831 establishes that a qualifying captive may only pay taxes on its investment income in a given year if its written premium is equal to or less than the established threshold of $2.2 million as adjusted for inflation. As of 2021, that threshold is $2.4 million.


Legitimate micro captives must meet the following criteria in addition to a gross premium income of less than $2.4 million:


  • Be regulated and operated as a legitimate insurance company, meaning it has enough capital to take on risks and adhere to all insurance company regulations related to underwriting, claims, and other procedures.
  • Be a US taxpayer domiciled in the US or offshore.


The issue that has arisen with the IRS in regard to micro captive insurance companies is that as a whole, micro captives have been mismarketed as tax breaks rather than regulated financial institutions, which has led to what the IRS deems abusive transactions, such as writing off premiums that were never paid, failing to diversify risks, and not properly forming or managing the entity as a licensed insurer, thereby gaining illegal tax breaks.


The Challenges With Some Micro Captives


Micro captive promoters often deceptively market these institutions as opportunities for tax deductions, leading the IRS to place micro captives on their list of “Dirty Dozen” tax scams due to their potential for tax evasion and avoidance.


Micro captives are problematic because they:


  • Lack attributes of a genuine insurance company, such as risk shifting and distribution, non-compliance with their domicile insurance regulations, and paying claims from a separate account
  • Often do not work with any policy-issuing companies to issue coverage to their insured members
  • Have vague or deceptive terms, including a lack of diversification conditions that stipulate that no single captive member may hold more than 20% of the premiums
  • Ask for premium amounts that may be unsupported by actuarial analysis or underwriting
  • Have promoters, insurance managers, and reinsurers who may have common ownership interests leading to a conflict of interest
  • Do not pay out claims every year or have an insufficient claims process
  • May engage in risky investments or loan or transfer capital in a manner that does not coincide with an insurance company


In Notice 2016-66, the IRS labeled micro captives as “potentially abusive” and required disclosure on tax filings. Since then, more than 500 companies have sued the IRS, but not one has been successful.


The tax court has determined that a micro captive failed to qualify as an insurance company in some cases. The most recent case, Caylor Land and Development vs. Commissioner, was the first case involving penalties for the micro captive.


discussing documents


Micro Captives Are Different from Group Captives in These 5 Ways


If you are considering captive insurance, it’s crucial to understand that micro captives and group captives are not the same.


1. All Captives Must Be Organized and Managed as Insurance Companies


Micro captives are regulated by the state of domicile’s Dept. of Insurance. For instance, legitimate insurance companies and group captives have trustworthy risk distribution so that no one entity delivers all the risk when big claims are filed. Micro captives are owned by one entity which requires a committed focus to properly create risk diversification. Additionally, abusive micro captives often fail to provide adequate capital funding, or to offer actuarially sound policy premiums. In some cases, abusive micro captives have a claims process that is insufficient or even absent altogether.


While not every micro captive company is abusive, those that fail to adhere to the IRS standards for insurance companies are essentially running a scam that promises legitimate insurance but instead, utilizes the IRC 831(b) as an illegal tax shelter while not actually providing legitimate insurance coverage.


Legitimate insurance programs such as stop loss group captives through Roundstone offer health insurance coverage through fronting insurers that are well established and cost effective. There is no question of risk transfer or distribution. Roundstone allows you to join with other businesses to form a group captive insurance plan that safely transfers risk and provides coverage based on your company’s needs. We meet all IRS risk distribution regulations and follow a strict claims process to ensure you are timely reimbursed for claims made under your plan.


2. Captives Are Required to Engage in Risk Shifting and Risk Distribution


Often, micro captives only have one owner, making risk distribution an essential requirement to be a legitimate insurance company. All Roundstone group captives have multiple owners. For example, in a group captive, you and hundreds of other small to midsize businesses join together to share risk among every business in the group captive.


3. Policy Premiums Must Be Actuarially Sound in Their Development


In some cases, micro captives have been found to have premiums that are not properly underwritten or developed. For example, the IRS has seen instances where the micro captive duplicates a taxpayer’s commercial coverage, meaning the taxpayer already had existing insurance coverage used to report claims and yet still paid its own insurance company redudant premiums not based on actuarial determined risk.


In other cases, the premiums charged by a micro captive were significantly higher than those paid to commercial insurance companies. Since the purpose of a captive insurance company is to save money on insurance premiums, the tax deception motives are clear.


In a group captive, premiums are actuarially sound. Our underwriters and other team members work with you to properly price and estimate costs based on actuarial manuals and long standing underwriting practices, charge premiums, report claims, and learn about cost-savings initiatives so everyone benefits.


4. Captives Should Pay Claims


Because micro captives are often not focused on actually providing insurance, they may not process any claims every year. Instead, they simply put premiums in their account that total up to the $2.4 million threshold and then don’t pay anything out over a year.


This does not happen in a group captive insurance company. Each member of a group captive also has their own stop loss policy for high-cost claims, so that when a claim is presented to the business, they’re covered by the stop loss insurer and its reinsurers.


5. Micro Captives Are Limited In Their Annual Premium Writings


To qualify as a properly organized and managed insurance company, a captive must be capitalized consistent with its domicile’s requirements and premium writings. Micro captives also cannot exceed more than $2.4 million in annual premium writing so that they can stay below the tax threshold annual premium limit.


Because they often represent ten or more small to midsize businesses, group captive insurance companies take in more funding through premiums and are over the $2.4 million threshold. As a result, they pay federal income taxes on their underwriting income.


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Roundstone Group Captive Insurance is a Better Alternative

If you are looking for a legitimate alternative to fully insured insurance, Roundstone offers group captive insurance that can save you money while still providing quality healthcare to your employees.


Our group captives mean you only pay for what you need each year, rather than paying high premiums and letting the insurance companies keep the money they don’t pay out in claims. We provide you with the data you need to plan rather than sending you unexplained rate hikes each year.


Our Cost Savings Investigators (CSIs) help you find areas where you can save, whether it’s adding wellness incentive programs or a different way for your employees to get affordable prescriptions.

Roundstone group captives offer all these savings legitimately, and are not under the IRS scrutiny like micro captives.


Contact Roundstone Today


At Roundstone, our team of insurance experts includes nurses and specialists in actuarial, claims, risk management, and underwriting to help create a legitimate plan that provides the coverage your employees need at an affordable rate.


Our end-to-end support and data analytics ensures complete transparency, so you know how your money is being spent, allowing you to make the right financial decisions for your company. Request a proposal today to learn how a group captive can help you lower your insurance costs.




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