10 THINGS TO KNOW
TO PARTICIPATE IN AN 831(b) PLAN, YOU MUST MEET A FOUR-PART TEST
The plan must include a transfer of risk from the participant’s operating company. To achieve this, SRA utilizes a direct writer. Along with a transfer of risk, the plan must utilize the law of large numbers to distribute risk among unrelated parties. The risks being addressed by the plan must be fortuitous in nature, and not ordinary business risks. Lastly, the plan must act according to the generally accepted principles of insurance.
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.
YOU’RE IN CONTROL
An 831(b) Plan can be tailored to meet a company’s specific risk management and financial needs. Select from many different plan options to fill gaps in current policies and cover the risks that are not addressed by traditional insurers. Plan reserves can be managed to fit a participant’s risk tolerance and investment goals.
DESIGNED TO COMPLIMENT YOUR BUSINESS
We understand the complex lives business owners have. SRA’s 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 is meeting the four-part test and achieving the risk mitigation goals of the business owner. SRA has a defined process to assist business owners through plan implementation and ongoing plan maintenance.
CONTRIBUTION LIMITS AND DISTRIBUTION RULES
Like a 401(k) Plan, an 831(b) Plan has annual contribution limits. As the plan’s administrator, SRA uses a defined methodology to determine annual contributions. Two main factors include gross revenues and the participant’s industry. Plans operating for three to five years are subject to annual solvency testing; distributions may be required depending on the plan’s solvency. Plan participants can elect to distribute plan reserves by declaring a dividend. Dividends are limited to surplus reserves.
TAX DEFERRAL DOES NOT MEAN TAX FREE
831(b) Plan reserves are held in a C-Corp that elects under the 831(b) tax code which allows for up to $2.3 Million in annual tax deferred contributions (subject to contribution limits). 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.
YOU HAVE OPTIONS TO ACCESS PLAN RESERVES
As detailed above, plan participants may elect to distribute plan reserves by declaring a dividend. More importantly, when catastrophe strikes, business owners can file a claim against the 831(b) Plan like a traditional insurance policy. SRA guides plan participants through a defined claims process, in order to ensure compliance with the principles of insurance. After the claim is properly processed, participants will be made whole in consideration of losses incurred up to plan limits.
NOT A RISK-FREE TRANSACTION
In order to meet the risk distribution requirement of the Four-Part Test, all 831(b) Plan participants are placed in risk co-ops with other participants and share in each other’s risk on a pro rata basis. Participants will be responsible for a portion of 831(b) Plan claims made by unrelated parties. Risk co-ops are designated by the individual risk being covered and utilize the law of large numbers to disperse risk amongst many participants.
TRANSPARENT FEE STRUCTURE
SRA charges a single annual fee to the 831(b) Plans it administers. The annual fee of $5,000 provides the plan participants with all ongoing plan maintenance including claims processing, annual tax returns, annual tax reporting requirements, plan adjustments, and proper documentation of plan distributions. The retained liability premium charged by the direct writer is an additional fee and is tiered based on annual contributions. Financial institutions holding plan reserves may charge additional fees.