(Bloomberg) — Hedge fund managers including billionaire JohnPaulson won't immediately face new limits on their use of insurancein offshore tax havens, after the IRS proposed rules and chose notto make them effective now.

The Internal Revenue Service rules, released on Thursday, willtake effect only after the agency takes comments and considers howseveral important terms will be defined.

The U.S. Treasury Department said in an Aug. 9 letter tothen-Senate Finance Committee Chairman Ron Wyden that it wasconcerned about a "loophole" that allows hedge fund managers tolimit their personal income tax bills by routing investmentsthrough insurance companies in low-tax jurisdictions.

Lindsey Held, a spokeswoman for Wyden, an Oregon Democrat,called the IRS announcement a "good first step in enforcement."

In 2012, top executives at Paulson's hedge fund invested $450million in a Bermuda-based reinsurer they'd set up known as PacreLtd. It has no employees, sells less insurance than industry norms,and invests almost exclusively in Paulson hedge funds.

Hedge fund manager Dan Loeb helped establish Third PointReinsurance Ltd. in Bermuda, and David Einhorn's Greenlight CapitalRe Ltd. is based in the Cayman Islands. Representatives from ThirdPoint Re and from Validus Holdings Ltd., which is a minorityinvestor in Paulson's Pacre, declined to comment on Thursday.

Short-Term Gains

Ordinarily, hedge fund managers' profits from trading are taxedas short-term capital gains at rates of up to 43.4%, plus statetaxes. Insurance companies only have to pay taxes on their reserveswhen sold, giving the hedge fund investors the ability to defertaxes and pay at the lower rates — 23.8% — that apply to long-termcapital gains.

The notice from the IRS doesn't use the word "loophole" anddoesn't invoke the agency's authority to immediately stop what itsees as abusive transactions. Instead, the notice said thegovernment is trying to "clarify" when "purported" reinsurancecompanies are really in the insurance business.

The IRS asked that comments be submitted within 90 days.

In June, Wyden pressed the Treasury Department to explain whyhedge fund insurers continue to proliferate after the IRS promiseda crackdown in 2003.

Claims Costs

The U.S. sought to target firms that have less of a focus onunderwriting insurance risks, a distinction that can becomplicated. Metrics that classify companies based on claims costs,reserves or investment income can be misleading because the figuresfluctuate year-to-year based on financial markets and the frequencyof hurricanes.

"Anyone that spent a day in our office would clearly see thatwe're a real insurance company," Chris Coleman, chief financialofficer of Third Point Re, said at a conference in March.

Evan Greenberg, chief executive officer of Zurich-based AceLtd., cited the U.S. push to adjust tax treatment of insurers as anexample of the "runaway regulatory environment" that he said ishurting an essential industry. Ace is starting a reinsuranceventure in Bermuda with BlackRock Inc.

"Efforts to enact comprehensive tax reform may once again targettaxation of foreign affiliate reinsurance used to efficientlymanage risk and capital," wrote Greenberg in his most recent annualreport to shareholders.

Greenlight Re climbed 0.1% to $30.34 as of 10:26 a.m. in NewYork trading. Validus was unchanged, and Third Point Re slipped0.9%.

–With assistance from Doni Bloomfield in New York.