Profit participation programs
Types of profit participation plans offered:
- Reinsurance
- Producer Owned Reinsurance Company (PORC), aka Controlled Foreign Corporation (CFC)
- Non-Controlled Foreign Corporation (NCFC)
- Dealer Owned Warranty Company (DOWC)
- Contingent Commission (Retro)
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Let’s review your goals to discover the best profit participation program for your dealership.
Highlights of Each Plan
Reinsurance - Producer Owned Reinsurance Company
- Most common structure in the marketplace
- Dealer owns it – no pooling with other dealerships’ F&I business
- Formed as a “c” Corp – dealer chooses company name, directors, officers and shareholders
- Ownership structure flexibility
- Most common domicile is the Turks and Caicos Islands
- IRC Section 953(d) election – treated as a domestic insurance company under the IRC
- US tax return and annual statement are completed each year
- Assets/cash are normally held in trust at a US bank (money never leaves the US)
- Dealer/owner flexibility:dividends, loans, surplus investments
Reinsurance - Non-Controlled Foreign Corporation
- Domiciled in an offshore country
- Ownership is represented by purchasing preferred, non-voting stock
- No annual premium thresholds
- Company decisions are made by the Board of Directors, hence, no control by the shareholders
- Tax returns and annual statements are not reported to the IRS
- Not subject to federal income tax, but pays a federal excise tax of 1% of net written premium
- Shareholder
- Passive Foreign Investment Company (PFIC) exemption*
*Quantitative threshold test requires the insurance company to qualify as an insurance company under IRS code and have liabilities which are more than 25% of the total assets of the company (F&I unearned premium reserves do not count as liabilities). This “test” was part of the 2017 Tax Cuts and Jobs Act.
Dealer Owned Warranty Company (DOWC):
- Dealer forms a new corporation (C Corp) in the state of the producing dealership(s)
- DOWC is the obligor, but not a licensed insurance company
- DOWC registers as a service contract provider in the states it will do business in
- Program is administered by a third party, in this case Zurich
- A failure-to-perform contractual liability policy (CLP) is included in the program
- Minimum capital may be higher than PORC or NCFC structures ($50,000 - $500,000)
- Trust account requirement is at the discretion of the administrator/CLP provide
Contingent Commission (Retro):
- No upfront money to participate
- Minimal investment income paid
- No downside risks
- No dealer control or decision making
- Retro payments are normally paid to the dealership
