Both terms refer to the same concept and are often used interchangeably. An 831(b) Plan, also called Micro Captive Insurance, refers to a small insurance entity that qualifies for special tax benefits under Section 831(b) of the U.S. Internal Revenue Code. These entities are taxed only on investment income rather than on premiums collected, up to a certain limit. This structure is advantageous for small and mid-sized businesses looking to enhance risk management with tax-deferred funds.

The term “Micro Captive” originated from it being a smaller version of a traditional captive insurance company, which operates under Section 831(a) and typically serves larger businesses. Unlike traditional captives, a Micro Captive is designed for smaller businesses to provide cost-effective coverage for risks that may be too expensive or unavailable in the conventional insurance market.

• Primary Benefit: More Efficient Risk Mitigation
  Traditional insurers cover many business risks, but as seen during events like the COVID-19 pandemic, policies may exclude key coverage areas. An 831(b) Plan helps business owners manage risks that traditional insurance may not cover, providing an additional layer of protection.

• Secondary Benefit: Tax-Deferred Contributions
  An 831(b) Plan allows business owners to defer income for future risks. Without such a plan, businesses are essentially self-insuring these risks using after-tax funds. With an 831(b) Plan, when unforeseen events occur, business owners can use tax-deferred reserves to address the financial impact.

Establishing an 831(b) Plan involves four key phases:

1. Discovery & Education: Initial meetings to assess your business needs and educate you on the plan’s benefits.
2. Risk Analysis: A detailed evaluation of your company’s risks to develop a long-term risk management strategy and determine appropriate coverage.
3. Implementation: Formal setup of the plan, including deciding on ownership structure and obtaining necessary insurance coverages.
4. Monitoring & Adjustment: Continuous monitoring to ensure compliance and alignment with business needs, with adjustments as required.

Costs include an initial setup fee, annual maintenance fees, and a retained liability premium. These fees typically cover:

• Plan design and document preparation
• Risk assessments and transaction approvals
• Compliance with 831(b) regulations
• Filing of forms (e.g., 8886, 1099-DIV)
• Annual tax returns, renewals, and claim services
• Ongoing consulting

An 831(b) Plan complements traditional insurance by covering gaps that standard policies may not address. It can insure against under or uninsured risks such as brand protection, business interruption, cyber liabilities, key employee loss, supply chain disruption, political risk, and more. These policies are tailored to cover intangible and unique risks that traditional insurance often excludes.

Reserves within an 831(b) Plan are held in a C-Corp that operates under Section 831(b), allowing for up to $2.8 million in tax-deferred contributions annually (subject to limits), with inflation adjustments. Investment income and gains from the plan’s reserves are taxed at the C-Corp rate, while dividend distributions to shareholders are taxed at the qualified dividend rate.

The IRS closely monitors micro captive insurance structures, including 831(b) Plans, for potential non-compliance. They look for red flags such as premiums that aren’t set at arm’s length, lack of true risk distribution, or operations that don’t resemble legitimate insurance companies. To ensure compliance, we have implemented a rigorous 4-Part Test for the 831(b) Plans it administers. Additionally, the IRS has labeled some micro captives as “transactions of interest,” indicating heightened scrutiny. We help clients stay compliant by ensuring all necessary disclosures are filed, which is included in the annual maintenance fee.

To avoid potential challenges from the IRS, businesses must ensure compliance by following a 4-Part Test, ensuring genuine risk distribution and proper risk shifting. Premiums should be set at arm’s length, reflecting true market rates, and the captive should function as a legitimate insurance company. It’s essential to engage experienced professionals to properly set up and manage the 831(b) Plan, ensuring it meets IRS requirements.

An 831(b) Plan offers a tailored approach to risk management by providing coverage for risks not typically addressed by commercial insurers. This ensures businesses are protected against a wider range of potential losses. The plan can lead to more predictable financial outcomes and encourage investments in loss control measures, as businesses directly benefit from fewer claims.

Generally, the business owner or stakeholders hold ownership of the 831(b) Plan, while maintaining control over its operations. However, to preserve its status as a separate insurance entity, the plan must operate independently from the parent company. Plan reserves can be managed by a trusted advisor, aligning with the participant’s risk tolerance and investment goals.

Yes, an 831(b) Plan is highly customizable to meet the specific risk management and financial needs of your business. It can fill coverage gaps in existing policies and address risks that are often not covered by traditional insurers. Our process ensures that the plan meets the 4-Part Test and aligns with the business owner’s risk mitigation goals, while also minimizing disruptions to the business.

Claims for an 831(b) Plan can be filed through Cardinal Point Insurance. The claim process functions similarly to that of a traditional insurer. Once a claim is submitted, Cardinal Point validates the claim and, if approved, pays the policyholder. Claim forms can be submitted online, and after submission, the process begins with Cardinal Point contacting the policyholder within a few business days.

An 831(b) Plan can enhance cash flow by making premiums tax-deductible. If claims are lower than expected, underwriting profits can be reinvested or distributed to shareholders, further benefiting cash flow. However, proper management is crucial to ensure the financial health of both the 831(b) Plan and the parent company.

Businesses in industries with high insurance costs or unique risks not covered by standard commercial insurance often benefit the most from 831(b) Plans. Industries such as healthcare, construction, manufacturing, real estate, retail, technology, and the service industry have found these plans valuable. To determine if an 831(b) Plan is suitable for your business, an assessment can help.

An 831(b) Plan allows businesses to self-insure and set aside tax-deferred funds, providing stability when the commercial insurance market becomes volatile. During periods when insurers raise premiums or restrict coverage, such as in the current hardening property and casualty market, businesses can rely on their 831(b) Plans to cover underinsured or uninsured risks. This enables businesses to maintain cash flow and avoid dependency on uncertain government bailouts, providing greater resilience in unpredictable market conditions.