Everyone has heard the saying, “If it seems too good to be true, it probably is.”
Can you imagine how many people said that in 1978 when they first heard about a new-fangled type of retirement plan called the 401k? Fast forward to 2023 and today, if someone told you that adopting a 401k plan for your business is way too risky, you would no doubt wonder where they have been for the last 45 years, right?
Yet, that attitude is an all too common response towards another tax law that has 37 years of history behind it, known as the 831(b) Plan (aka, a captive insurance company). Once a person truly understands what the 831(b) Plan can do for their business, those doubts evaporate quickly.
What is an IRC 831(b) Plan?
831(b) is the tax code section that allows your business to create its own insurance company with tax deferral benefits. Like your company’s 401k plan, the 831(b) plan shares many similarities.
5 Similarities Between 401k and 831(b)
- 401k contributions are tax deductible. 831(b) premiums are a deductible business expense.
- Contributions (Premiums) fund a specific future benefit: 401ks for personal retirement savings and 831(b) for under or uninsured business risks.
- 401ks have maximum contribution limits as do 831(b) plans.
- Each plan must comply with strict guidelines; 401k has ERISA guidelines, and the 831(b) Plans must follow a 4-Part Test to ensure compliance.
- Each plan requires a 3rd party administrator to insulate it from self-dealing.
To further understand these similarities, click here.
Can this type of plan be managed in-house?
No. Like the 401k plan, the 831(b) plan has safe harbor rules and requires an administrator.
One strict requirement of an administrator is to ensure compliance. Built on the foundations of Rev. Ruling 2009-26 and recent court rulings, SRA Admin follows a stringent 4-Part Test to ensure ongoing compliance:
- Risk Transfer: A contractual risk transfer must be from the operating company to the insurer.
- Risk Distribution: Risk must be dispersed among unrelated parties using the law of large numbers.
- Fortuitous Risk: Risk must be unpredictable and not considered an ordinary business risk.
- Principles of Insurance: The plan must function like a standard for-profit insurance company.
5 Benefits That Make an 831(b) Plan Attractive
1. Self-insuring can save money.
You gain flexibility to self-insure against future risks that are too costly or not underwritten by commercial insurance.
2. Premium contributions are deductible.
As of 2023, premiums up to $2.65 million per year are deductible (subject to inflation and plan guidelines).
3. Withdrawals outside claims are allowed.
Premiums are invested conservatively while at risk. Once the risk expires (typically after a year), funds can be reinvested or distributed.
4. Withdrawals are tax friendly.
Withdrawals are treated as qualified dividends and taxed at a long-term capital gains rate of 20%.
5. Broad risk coverage options
- Brand Protection: Covers media events that impact brand trust.
- Supply Chain Interruption: Covers disruption from weather, outages, or unrest.
- Data Breach & Income Loss: Protects against cyber risks and income loss.
- Political Risk: Covers government actions causing financial harm.
- Dispute Resolution: Covers employee, customer, or contractor legal issues.
- D&O Protection: Protects company directors and officers from personal liability.
- …and more.
Does Your Company Qualify?
- You have risks that can’t be insured traditionally.
- You pay high insurance premiums with a low claims history.
- Your company has consistent cash flow and profitability.
- You have unique risk exposures too costly or uninsurable commercially.
- You’re looking to reduce commercial insurance costs.
In review, much like the 401k plan, the 831(b) Plan is used by savvy business owners who understand the importance of preparing for both known and unknown risks (like a pandemic).
“Don’t try this at home, kids.” Like your 401k, choosing an 831(b) administrator is the critical first step.
SRA 831(b) Administrators are committed to your financial security. With 10+ years average experience, our team builds creative, well-designed plans tailored to your business needs. Take our assessment to see if you qualify.