Company Gets OK to Transfer Benefits Program to Vt. Captive.

Columbia Energy Group has been notified of a favorable ruling by the U.S. Department of Labor that would allow it to transfer the risks from a portion of its employee-benefits program into a captive insurance company in Vermont, said Kathryn Westover, chief operating officer of Strategic Risk Solutions, a company that specializes in captive formation and management.

"Now that they have had notification of a favorable ruling, they are going to the next step of the process," Westover said. "A formal letter has to go out to all employees, and they have a 30-day period to ask questions or voice concerns."

A Labor Department spokesman said the ruling isn't official until it is sent to the Federal Register for publication.

Columbia Energy, a major energy-services company based in Herndon, Va., applied two years ago to the Labor Department for an exemption from the "prohibited transaction" rules, which prevent a captive from insuring or reinsuring employee benefits.

That approval could spur more corporations to move their employee-benefit programs into captive insurance companies--risk-transfer vehicles established by companies whose primary business isn't insurance.

Columbia Energy will use the new Vermont branch of its Bermuda-based captive to reinsure its long-term-disability risk. The long-term-disability insurance is part of an integrated-benefits program designed to get injured employees back to work as soon as possible by applying the same claims-management practices to a company's short- and long-term disability claims as it uses for its workers' compensation claims.

The ruling on Columbia Energy could set a precedent with far-reaching effects.

"It's going to open the floodgates as soon as something happens," Derick White, assistant director of captive insurance for the Vermont Department of Banking, Insurance, Securities and Health Care Administration, said in March. "If you look at employee life or disability, it's fairly easy to predict what to reserve based on the actuarial tables, and it is very profitable."

But the overriding reason for moving employee benefits into a captive is tax deductibility, White said at that time. The Internal Revenue Service has ruled that in order for premiums paid to a captive to be tax deductible, the captive must have at least 30% unrelated business. Employee benefits could easily become 60% of a captive's business, he said.

Most employee-benefit plans are subject to the Employee Retirement Income Security Act, which is administered by a division of the Labor Department. Employee benefits covered by the act include pensions, health, disability, death, prepaid legal services, vacation, day-care centers, scholarship funds and training. Without an exemption from the department, a company that wants to transfer its employee-benefit risks to a captive must do so offshore.

To encourage companies to establish employee-benefits captives in Vermont, the state Legislature passed a regulation allowing companies that have offshore captives to create branch captives in Vermont.

Westover said moving an integrated-benefits program into a captive would improve the way the benefits are provided to the employees. That's because companies that are self-insured aren't required to project how much disability claims will cost over a certain period.