A Producer Affiliated Reinsurance Company (PARC) can be an excellent choice for dealerships that are capable of managing a reinsurance entity and are looking for long-term growth opportunities. In this profit participation program, there is a company that provides the F&I products and another company that can "reinsure" the F&I contract.
What is a Producer Affiliated Reinsurance Company (PARC)?
A PARC is when a dealer creates a foreign or tribal-domiciled reinsurance company to assume the risk of contracts sold by affiliated dealerships. Little to no upfront capital is required to establish a PARC.
This structure is also commonly known as:
- CFC (Controlled Foreign Corporation)
- Dealer Owned Reinsurance Company (DORC)
- Producer Owned Reinsurance Company (PORC)
When you own a PARC or other type of reinsurance company you give yourself and/or your designated recipients, such as your kids or grandkids, the opportunity to grow additional revenue streams through a structure that strategically helps you meet your goals.
Advantages of PARC Structures for Dealerships
Before deciding if a PARC is right for your needs, it's vital to recognize how this structure at your dealership enhances your own profitability. Though more complex than other profit participation structures, this program is relatively inexpensive to form and operate. Dealers also have the ability to establish multiple PARCs, but it’s crucial to adhere to all attribution and controlled group rules.
Participation in underwriting and investment income
Similar to a Retrospective Commission or NCFC program, in a PARC structure you're involved in a more significant level of underwriting. However, a PARC allows for greater customization of investment income opportunities.
Potential tax benefits
When you choose a PARC program, you need to be clear on the ways that the entity will be taxed at the corporate level and to the shareholder(s). Profit participation through reinsurance can be a valuable way to help you increase wealth over time when handled correctly. Make sure the tax advantages of reinsurance are discussed within the requirements of federal and state U.S. insurance taxation.
Considerations and Challenges of PARC
Though managed by a third party, the complexity of a reinsurance company must be carefully considered. Adherence to regulatory and tax guidelines, while growing long-term investment and underwriting profits is the goal. Here's what to think about as you establish a PARC program.
Choose the right business structure
Know where the PARC company is located and the regulatory and tax implications of doing business with a home base in that location. PARCs are typically established as either a foreign or tribal-domiciled reinsurance company. Both options require around $5K for start-up costs, though they differ on the time to establish once paperwork is submitted. Ongoing annual general expenses for a PARC are minimal (approx. $5K annually). When making an 831(b) election, a PARC receives tax advantages when writing less than the statutory premium limit ($2.8 MM in 2024).
Reduce your dealership's tax burden
In a PARC that complies with the current year premium limit, the only Federal corporate tax is on realized investment income. Also, shareholders can defer shareholder taxation until a future distribution is taken. Keep in mind that PARCs are subject to a premium tax that varies by state and product. For some dealers, the annual IRS premium limit would be a drawback to choosing this structure. However, as long as the company stays under the annual premium limit, ceded premium is not subject to corporate tax.
Best Use Cases for PARC in Dealerships
A dealership with the capacity to manage a reinsurance entity, and one that’s also seeking long-term growth and generational wealth building, is generally a candidate for this particular type of automotive profit participation program. The level of administration needed for this profit-sharing structure is greater than what's needed for many other types of structures. These dealers are also not looking for upfront cash, yet they want to maximize their participation and tax benefits and are willing to take on some risk.
Finding a Quality Reinsurance Program for Your Dealership
A Producer Affiliated Reinsurance Company (PARC) is a popular choice with automotive dealers due to the control over distributions and investment options. It can be a great, inexpensive choice for a dealership looking to further their growth strategy options.
Whether you're just starting out or looking to add additional benefit to your business, find a partner that can help support your goals. At JM&A Group we're here to help you find the right profit participation program for your needs, talk to our team today!
< 1 min read
Podcast
