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Is a Captive Insurance Company (CIC) Right for Your Medical Practice?

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A Medical Practice Risk Management Strategy

By Guy P. Jones CFP®

Successful practices face multiple risks in their daily operations including loss of a medical license or professional certification, legal defense reimbursement, medical/Medicare collections risk, HIPAA violations, and reputational risk. Small- to medium-sized practices can benefit from risk-management tools that can help them handle such risks more effectively and reduce their overall insurance costs. To that end, the practice may want to consider the establishment of a Captive Insurance Company (CIC) to protect themselves from risks not typically covered by traditional insurance companies.

Captive Insurance Planning

Captive insurance planning is a strategy for physicians to manage risk through the purchase of a property-casualty insurance policy. Premiums paid by the practice to a properly structured CIC should be tax-deductible to the practice under section 162(a) of the IRS code just like their workers’ compensation or malpractice coverage.

When the practice forms a CIC, it receives premium income tax-free up to $1,200,000 per year, per captive. Profits that come out of the CIC come out as a distribution from a C-corp. as qualifying dividends or long-term capital gains, which are currently 15%. Furthermore, the CIC may retain surplus from underwriting profits within reserve accounts, free from income tax. Profits that accumulate within the CIC can be used as a tax-deductible sinking fund in order to save money on malpractice premiums by shifting to a high deductible policy and/or insuring that deductible through the CIC.

No Rules – Just Right

There are no hard-and-fast rules regarding the minimum amount of gross revenue from a practice or the minimum amount of insurance premiums paid by a practice before considering the establishment of a CIC.

Planning Opportunities

The establishment of a CIC creates immense planning opportunities for physicians because of the flexible ownership of the CIC. The CIC is set up as a C-Corp and someone or some entity owns the shares of the C-Corp While it’s important to keep in mind the primary business purpose of the CIC is for risk management, some potential planning opportunities include the following:

  • Wealth Accumulation/Surplus Retirement Income: Physicians own the CIC outside the practice for surplus dollars in retirement.
  • Asset Protection Planning: Most physicians have the CIC owned inside an asset protection trust to potentially shield pre-tax dollars and assets from judgment creditors or litigation.
  • Estate Planning/Wealth Transfer: Physicians who don’t need access to this money may be interested in having the CIC owned outside of their estate to also bypass gift and estate taxes with each premium payment.
  • Practice-Owner Benefits: By the CIC not being an employee benefit plan, it is not subject to the non-discrimination rules of ERISA, and therefore only benefits the owners of the practice.
  • Non-Mandatory Participation for Practice Doctors: Doctors at smaller levels can join together to create a CIC for economies of scale.

Enter the Experts

Physicians would be encouraged to discuss the various CIC planning strategies with their tax, estate planning, and other legal professionals to ensure that the most appropriate structure is utilized to fit their unique planning objectives. As part of our services to the practice, we would be happy to meet with the practice management and advisors to answer any questions and start the process of the feasibility of a CIC for the practice. As reassurance, this is already IRS-tested, and we strictly adhere to each IRS Safe Harbor Revenue Ruling for a conservative model offering very predictable risk management and tax planning results.

Assessment

While this is not intended to be a thorough discussion of CICs, it is meant to initiate a conversation with practices or conduct due diligence with their key advisors as to the many potential benefits of establishing a Captive Insurance Company.

About the Author

Mr. Guy P. Jones is a Certified Financial Planner in Houston, TX who has specialized in serving the financial planning needs of medical professionals and their families since 1990.  He can be reached at 832.677.1692, email: guypjones@guypjones.com, or by visiting his website: www.guypjones.com

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