| Program | How it works | Key features | What it achieves | U.S. federal income tax consequences |
|---|---|---|---|---|
| Guaranteed Retro | Dealer receives commission for sale of F&I product plus guaranteed underwriting profit. | Guaranteed flat dollar amount per contract (varies based on product and sales mix). Payment is based on contract count net of cancellations (not based on loss ratios). |
Not subject to losses Accelerated cash flow Upfront underwriting Don’t have to set up reinsurance company |
Taxed as ordinary income for Federal Income Tax purposes @ 37% for individuals. However, the Tax Cuts and Jobs Act (TCJA) may allow a deduction up to 20% of the income if paid to an S Corp or LLC taxed as a partnership. |
| Participating Retro | Dealer receives commission for sale of F&I product, plus underwriting and investment income. | Dealer does not have to invest in or open a reinsurance company. Dealer must recognize revenue as received. Historically, all upside, no downside |
Highest cash flow program No reinsurance required 100% of underwriting profits and any investment income that is available |
Taxed as ordinary income for Federal Income Tax purposes @ 37% for individuals. However, the Tax Cuts and Jobs Act (TCJA) may allow a deduction up to 20% of the retro income if paid to an S Corp or LLC taxed as a partnership. |
| Reinsurance through Controlled Foreign Corporation (CFC) or Domestic Captive | Dealer receives commission for sale of F&I product, plus underwriting and investment income in dealer-owned reinsurance company. Dealer participates in risk of loss through a wholly owned reinsurance company. Options for domicile of reinsurance company |
Dealer controls program. Dealer hires an investment manager. Assets set aside for losses (A account). Earned income separately invested and controlled by dealer (B account). Funds held at U.S. banking institutions. Cost for setup, annual tax preparation and license renewal, and reserves/funding |
High level of control over the program, allowing tailoring of investment options to meet various dealer objectives Efficient tax vehicle Dealer directs investment of earned funds in trust and receives investment income. |
Treated as a U.S. Company for ALL federal income tax purposes For tax years beginning after 12/31/2016, with a total annual net written premium up to $2.8 million, tax on investment income only @ 21% corporate rate under TCJA (irrevocable election is required to be taxed on investment income only) If total annual premium exceeds $2.8 million, regular corporate income tax applies on ALL underwriting and investment income @ 21% corporate rate, and a second layer of tax at the shareholder level once distributed @ 23.8% (20% capital gains rate plus 3.8% Medicare NIIT). |
| Domestic captive insurance company | Same as reinsurance company, but company is 100% U.S. based. | Same as reinsurance company. | ||
| Obligor structures* | Dealer receives commission for sale of certain F&I product, plus underwriting and investment income in dealer-owned obligor company. | Dealer-owned company is obligated party to perform on any losses (not administrators).Dealer pays administration and claim processing fees. Dealer is responsible for maintaining reserves. Contractual liability policy may be required. |
No reinsurance required. Dealer keeps all funds received, less administration and claim processing fees. |
Obligor will be treated as a C corporation for U.S. Federal Income Tax purposes, subject to double taxation regime of IRC Subchapter C. Retail price to consumer (as opposed to reserve) counts against $2.8 million USD cap under Section 831(b). If premiums exceed $2.8 million annually, company is fully taxable on underwriting and investment income from first dollar. Initially generates tax losses, because a 100% deduction is allowed for amounts above reserve (F&I commission, management money, etc.), and reserves earn over the life of the VSC, subject to the 20% UEP “haircut”. Eventually, all underwriting and investment income is subject to tax at 21% corporate rate (on a deferred basis), and shareholders will be taxed a second time upon distribution from the company (double taxation). Distributions/liquidations taxed at long-term capital gains rate of 23.8% (20% capital gains rate, plus 3.8% Obamacare tax). No premium tax is paid if no CLP required. |
| Hybrid structures | Dealer receives commission for sale of F&I products plus underwriting and investment income through a combination of participating structures. | Hybrid structures allow programs to be built to achieve specific dealer objectives. May be set up for partners, key associates, or family members. Split business among a combination of participating retro/CFC. |
Customized | Varies |
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