Question 1

What is the difference between a Micro Captive and an 831(b) Plan?

Accepted Answer

These terms describe the same tool and are used interchangeably. An 831(b) Plan, also known as Micro Captive Insurance or simply a Micro Captive, refers to a small insurance entity eligible for special tax advantages under Section 831(b) of the U.S. Internal Revenue Code. Such entities are taxed solely on their investment income rather than on the premiums collected up to a specified threshold. This tax structure is particularly advantageous for small to medium-sized enterprises seeking to enhance their risk management strategies with tax-deferred funds.  Why Micro Captive? The term 'Micro Captive Insurance' was derived from it being a smaller version of a traditional captive insurance company, which elects under the 831(a) Tax Code and caters to much larger enterprises to insure traditional risks. In contrast, a Micro Captive is designed to cater to the needs of smaller businesses, providing a cost-effective way to insure against risks that might be too expensive or impossible to cover in the conventional insurance market.

Question 2

What are the specific benefits of an 831(b) Plan for my business?

Accepted Answer

PRIMARY BENEFIT: MITIGATE RISK MORE EFFICIENTLY Traditional insurers cover a large portion of the risks business owners face. However, as many business owners learned during the COVID-19 pandemic, their policies often limited or excluded coverage. There are also many losses that insurers will not cover. An 831(b) Plan mitigates the risks business owners take each day, whether they realize it or not. SECONDARY BENEFIT: TAX-DEFERRED PLAN CONTRIBUTIONS An 831(b) Plan allows a business owner to defer income to address tomorrow’s risks. Without an 831(b) Plan, business owners are self-insuring risks, such as a business interruption, with after-tax money from cash flow. With an 831(b) Plan, when catastrophe strikes, business owners can utilize these tax deferred reserves to weather the storm.

Question 3

What is the process of setting up and 831(b) Plan? What are the associated costs?

Accepted Answer

Setting up an 831(b) Plan involves a structured four-phase process: Discovery & Education: Initial meetings are held to understand your company's specific needs and to educate you on the benefits and setup of an 831(b) Plan. Risk Analysis: This phase involves analyzing your company's risks and devising a long-term risk management strategy, including determining appropriate insurance coverages. Implementation: The plan is formally established, including deciding its ownership structure and company name, and you will engage an agent to purchase necessary insurance coverages. Monitoring & Adjustment: Continuous monitoring and communication ensure the plan remains aligned with your business needs and compliant with regulations, with adjustments made as necessary. Costs include an initial set-up fee, an annual maintenance fee, and a retained liability premium. SRA strives to offer a transparent fee structure without hidden fees. These fees include:  Initial design of 831(b) Plan Preparation of plan documents and risk assessments 831(b) Plan transaction approvals Monitor compliance with 831(b) Plan rules and guidelines Compliance filings of 8886, 1099-DIV, and meeting minutes Annual tax return Claim services Annual renewals Ongoing client consulting

Question 4

How does an 831(b) Plan differ from traditional insurance plans?

Accepted Answer

An 831(b) Plan is meant to fill in the gaps of traditional insurance, not replace it. Policies can be written for under or uninsured risks that are often intangible and include brand protection, dispute resolution, business interruption, audit, political risk, cyber liabilities, third-party business interruption, employer liability, key employee loss, representations and warranties, credit defaults, directors and officers, supply chain interruption, professional liability, recall, storage custom warranties, protection plans, deductible reimbursement, dental warranties, tenant rent protection, accidental damage warranties, contract default and more.

Question 5

What are the tax implications of establishing an 831(b) Plan?

Accepted Answer

831(b) Plan reserves are held in a C-Corp that elects under the 831(b) tax code, which as of 2024, allows for up to $2.8 Million in annual tax-deferred contributions (subject to contribution limits) and has an annual inflation rider adjustment. Investment income and realized gains generated by plan reserves are taxable at the C-Corp rate. Dividend distributions taken by shareholders are taxable to the individual at the qualified dividend rate.

Question 6

How does the IRS monitor 831(b) Plans?

Accepted Answer

The IRS is vigilant about potential abuses in the micro captive space. They look for signs of non-compliance, such as premiums that aren't set at arm's length, lack of genuine risk distribution, or 831(b) Plans that don't operate with the characteristics of a real insurance company. SRA has developed a stringent 4-Part Test to ensure compliance with the 831(b) Plans it administers. The IRS has previously identified certain micro captive structures as "transactions of interest," signaling their intent to monitor and potentially challenge perceived abuses. To address this, SRA ensures all clients file appropriate disclosures of the 831(b) Plan which is included in their annual maintenance fee.

Question 7

What measures can be taken to avoid any potential issues with the IRS?

Accepted Answer

To maintain compliance and avoid potential IRS challenges, businesses should follow a 4-Part Test. This ensures genuine risk distribution and risk shifting. In addition, premiums should be set at arm's length, reflecting true market rates. It's also crucial for the captive to operate like a genuine insurance company. Engaging experienced professionals in the setup and management of the 831(b) Plan is imperative to ensuring compliance.

Question 8

How can an 831(b) Plan help in effective risk management for my business?

Accepted Answer

An 831(b) Plan offers a tailored risk management solution. Businesses can fill coverage gaps by insuring against specific risks not covered by commercial insurers, ensuring they are protected against a broader range of potential losses. This can lead to more predictable financial outcomes and can also incentivize businesses to invest in loss control measures, as they directly benefit from reduced claims.

Question 9

How does the ownership and control of an 831(b) Plan work?

Accepted Answer

Typically, the business owner or stakeholders own the 831(b) Plan. While they exert control over its operations, it's crucial for the 831(b) Plan to operate independently of the parent company to maintain its status as a separate insurance entity.  Plan reserves can be managed by a trusted advisor to fit a participant’s risk tolerance and investment goals.

Question 10

Can an 831(b) Plan be customized to fit the unique needs of my business?

Accepted Answer

Absolutely. An 831(b) Plan is designed to complement a business and can be tailored to meet specific risk management and financial needs. Business owners can select from many different plan options to fill gaps in current policies and cover risks not addressed by traditional insurers.  SRA understands the complex lives of business owners. 831(b) Plans are meant to bring efficiencies to our client’s business and limit disruptions. As the plan’s administrator, SRA ensures the plan meets the four-part test and achieves the business owner's risk mitigation goals. SRA has a defined process to assist business owners through plan implementation and ongoing plan maintenance.

Question 11

What happens if a claim needs to be made? How does this impact the capital invested in the 831(b) Plan?

Accepted Answer

Filing a claim for an 831(b) Plan can be done through Cardinal Point Insurance. In the event of a claim, the 831(b) Plan functions similarly to a traditional insurer, adjusting and then paying out the claim. An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim (or denies the claim). If it is approved, the insurance company will issue payment to the insured. Claims can be submitted online using the claim form. Once the claim form is submitted, the claim will be opened. Cardinal Point Insurance will contact the policyholder in the next couple of business days to begin the claim process.

Question 12

How does an 831(b) Plan impact the cash flow and overall financial health of a business?

Accepted Answer

An 831(b) Plan can positively impact cash flow. Premiums paid to the 831(b) Plan are tax-deductible. Additionally, if claims are lower than expected, the net underwriting profits can be reinvested or distributed to the shareholders, further benefiting cash flow. However, it's essential to manage the 831(b) Plan effectively to ensure its financial health and the broader financial health of the parent company.

Question 13

Are there any specific industries or types of businesses that particularly benefit from 831(b) Plans?

Accepted Answer

While 831(b) Plans can benefit a wide range of businesses, those with unique risks not covered by commercial insurance or those in industries with high insurance costs can particularly benefit. Industries like healthcare, construction, manufacturing, real estate, storage, service industry, retail, and technology, among others, have found value in 831(b) Plans. To see if an 831(b) Plan is right for you, take the assessment.

Question 14

How can an 831(b) Plan provide stability against changes in the commercial insurance market?

Accepted Answer

An 831(b) plan provides stability against changes in the commercial insurance market by allowing businesses to self-insure and set aside tax-deferred funds for risks not covered by traditional insurance. This self-reliance is crucial, especially during the current hardening of the property and casualty (P&C) market, where premiums are rising and coverage options are becoming more restrictive. As insurers exit certain markets, businesses can use 831(b) Plans to manage specific risks like data breaches, supply chain interruptions, business interruptions from pandemics, deductible reimbursement, and many more under or uninsured risks. This ensures they maintain cash flow and avoid relying on unpredictable government bailouts. By customizing coverage, these plans offer a more reliable alternative to traditional insurance, enhancing business resilience in volatile market conditions.

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