Final IRS Regulations on Micro-Captive Listed Transactions and Transactions of Interest

The IRS and Treasury Department have released final regulations governing the reporting requirements for micro-captive insurance arrangements, refining the criteria for transactions classified as either listed transactions or transactions of interest under section 831(b). These regulations include notable changes from proposed regulations, narrowing the scope of affected transactions while reinforcing the government’s focus on tax compliance and abusive tax shelters.

Provisions of the Final Regulations

While many of these updates respond to industry concerns, they also reflect the IRS’s ongoing commitment to addressing potential tax avoidance. As a captive owner or manager, understanding these new rules is crucial for maintaining compliance and protecting your captive’s viability. Key focus areas include:

• Criteria of Listed Transactions: A significant revision in the final regulations concerns the loss ratio threshold used to identify listed transactions. Previously set at 65%, this threshold has been lowered to 30% over a ten-year period. Additionally, listed transactions must now meet both the Loss Ratio Factor and the Financing Factor criteria:

• Loss Ratio Factor: If a micro-captive’s loss ratio over the last ten years is less than 30%, the transaction may be classified as a listed transaction.

• Financing Factor: If the captive has loaned premium funds back to its parent or affiliates within the last five years without resulting in taxable income or gain, the transaction qualifies as a listed transaction if the loss ratio is also less than 30%. This conjunctive test replaces the previous disjunctive approach, which required meeting only one of the two criteria, thereby reducing the number of transactions subject to automatic classification as listed transactions.

• Adjustments to Transactions of Interest: For transactions of interest, the final regulations set the loss ratio threshold at 60%, down from the previously proposed 65%. While still a significant metric, this figure does represent a slight concession between the listed transaction threshold and the IRS’s original proposal. Transactions meeting this threshold are subject to disclosure reporting requirements but are not automatically deemed abusive. The IRS retained the ten-year loss ratio computation period, ensuring a more comprehensive evaluation of an entity’s financial history, however, if the entity is less than ten years old, the entire life of the entity is considered the loss ratio computation period. Additionally, if the loss ratio is over the 60% threshold and the financing factor exists the entity is considered a transaction of interest

• Exception: The final regulations do exclude captives issuing or reinsuring contracts purchased by unrelated customers.

• Election Revocation Under Revenue Procedure 2025-13: In conjunction with the new regulations, the IRS issued Revenue Procedure 2025-13, providing updated guidance on the revocation of the 831(b) election for micro-captive insurers. Under this guidance, captive insurers may request revocation for the current or preceding taxable year, provided the request is submitted before the tax return’s due date (including extensions), offering flexibility for entities reconsidering their micro-captive status in response to heightened regulatory scrutiny.

Implications for Captive Owners and Managers

A primary concern for captive owners and managers are increased reporting obligations. The final regulations define a listed transaction as one with a loss ratio of less than 30%, while a transaction of interest is one with a loss ratio of less than 60%. Captive owners must assess transactions against these revised loss ratio and financing criteria to determine if additional disclosures are necessary. Non-compliance may result in significant penalties.

Additionally, compliance and risk management remain critical. The final regulations now require that a transaction meet both the loss ratio threshold and involve a financing arrangement that does not result in taxable income or gain to be classified as a listed transaction. While the IRS has stated these rules do not eliminate the use of 831(b) captives, they emphasize the importance of maintaining a defensible loss history and avoiding financing arrangements that could trigger classification as a listed transaction.

Strategic considerations are also important. The new revocation procedures allow captives to revoke the 831(b) election for the current taxable year or the preceding taxable year if submitted no later than the due date of the return (including extensions). Now is the time to evaluate whether staying in an 831(b) structure aligns with long-term goals. If needed, these revised revocation procedures offer an alternative path.

Preparing for the Future of Micro-Captive Compliance

While some of these changes may seem complex, they provide an opportunity to refine and strengthen your captive’s operational framework. Collaborating with experienced professionals will be critical to managing risk and maintaining compliance as regulations evolve.

If you have questions about these regulations or need guidance on micro-captive transactions, our team is here to help—contact your CRI advisor today. Staying informed and adaptable in response to these developments is not just about meeting requirements, it’s about securing the future of your captive for long-term success.