An 831(b) Plan does not automatically trigger an IRS audit. However, like any tax election or advanced planning strategy, it must be properly structured and managed.
Section 831(b) allows qualifying small insurance companies (often called micro-captives) to elect favorable tax treatment. The IRS has scrutinized certain arrangements in the past, particularly those that were not operated as legitimate insurance companies.
The difference comes down to structure and compliance.
A well-designed 831(b) plan should follow a stringent 4-part test:
- A contractual transfer of risk
- Cover real business risks
- Maintain proper risk distribution
- Follow insurance and regulatory best practices
When implemented correctly, an 831(b) strategy is a risk management tool, not simply a tax strategy.
If you’re concerned about audit risk, the most important step is understanding how a compliant plan is built and administered.
Want to know what separates a properly structured 831(b) Plan from a risky one? Contact us to learn more.