Our 4-Part Test
Built on the foundations of Rev. Ruling 2009-26 and recent court rulings, SRA has created a stringent 4-Part Test to ensure 831(b) Plan compliance. Each part of the test is essential to successfully owning your 831(b) and the ability to elect under the 831(b) Tax Code.
There must be a contractual transfer of risk from the operating company to an insurer. The SRA 831(b) Plan utilizes a Direct Writer that underwrites the risk and issues policy contracts to the operating company in exchange for premium.
In order to reduce the possibility that a single claim exceeds the amount of premiums collected, the 831(b) Plan must utilize the law of large numbers to disperse risk among unrelated parties. Each 831(b) Plan ARC administered by SRA is allied with others in risk co-ops that share each other’s risk on a pro rata basis.
The risk being contractually transferred must be fortuitous in nature and not considered to be an ordinary business risk. SRA’s Direct Writer underwrites many different risks that are fortuitous in nature including business interruptions, dispute resolution, political risk, brand damage and many more.
The 831(b) Plan must act just as an ordinary for-profit insurance company would by following the principles of insurance. These principles include: contractual transfer of risk, utilization of the law of large numbers, a defined methodology to determine premium, a defined claims process to determine covered losses, and managing reserves to generate investment income.