831(b) Captives in 2026: More Flexibility, More Responsibility

The IRS recently announced that the annual premium limit for 831(b) captive insurance companies will increase to $2.9 million in 2026. That’s a positive development for businesses using captives as part of their risk management strategy — but it also comes at a time when the IRS is tightening enforcement around abusive arrangements.

What the new limit means for business leaders

For qualifying small insurance companies, the higher $2.9 million cap means you can set aside more money each year to insure against operational risks, retain profits within the captive, and smooth out unpredictable losses — all while maintaining the 831(b) tax election.

In simple terms, the IRS is reaffirming that 831(b) captives are legitimate, regulated tools for self-insurance. They’re written directly into federal tax law and updated annually. The increased cap is a sign that the IRS intends to keep 831(b)s as a permanent fixture of the risk management landscape.

The flip side: rising IRS scrutiny

At the same time, the IRS is making it clear that it will no longer tolerate “paper captives” — companies that exist primarily for tax benefits without real insurance operations behind them. New regulations issued in early 2025 identified certain abusive setups as “listed transactions,” subjecting them to mandatory disclosure and potential penalties.

How to stay on the right side of the IRS

Here are a few practical guardrails every C-suite team should ensure their captive follows:

• Operate like a real insurer. Premiums should be based on credible, third-party actuarial analysis — not arbitrary figures.
• Insure real risks. Focus on exposures your business actually faces. Avoid unusual or highly unlikely “coverages” designed just to justify deductions.
• Keep financial boundaries clean. No loans or circular transfers between the captive and its owners. Premiums go in; legitimate claims and expenses go out.
• Distribute risk properly. Captives must spread risk across multiple entities or through qualified pooling arrangements — not just insure one company’s balance sheet.
• Document everything. Maintain strong governance, board minutes, actuarial reports, and financial statements to prove commercial purpose and compliance.

The strategic takeaway

When structured and managed properly, an 831(b) captive is a powerful strategic tool — allowing companies to retain more risk, build reserves, and respond faster to business disruptions. The increased contribution limit to $2.9 million expands that opportunity.

But the message from the IRS is unmistakable: run your captive like a business, not a tax shelter. The captives that will thrive in 2026 and beyond are those built on real risk, solid underwriting, and transparent governance.