How do business owners use 831(b) plans to fund business risks?
Short answer: Van Carlson says some businesses may be able to expense premiums at the operating company and use pre-tax dollars to fund selected risks, depending on the business and plan (8:24). He says the plan can build reserves for deductibles, disputes, supply chain problems, or cyber losses (12:01). He also says pooled claims can affect the plan, so it isn't a complete solution (20:44, 24:24).
Andre Sospina interviews Van Carlson on the Family Office Podcast about 831(b) risk plans.
Van on premiums and tax treatment
Van Carlson says some businesses may be able to expense the premium at the operating company and fund risks with pre-tax dollars, depending on the business and plan. He says the premium in the plan stays tax deferred while the plan is active (8:24 to 8:51). (at 8:24)
Van on retained risks
Van says business owners can use the plan for deductible reimbursements and legal bills when general liability doesn't respond. He also names supply chain and cyber risks (12:01 to 13:25). (at 12:01)
Van on pooled claims
Van says the plan includes the potential to pay claims unrelated to the participating business. He says an owner may bear most of that business's own claims from its plan (20:44 to 21:42, 23:28 to 23:56). (at 20:44)
Van on reserves and illiquid investments
Van says his company does not manage the plan's money, which clients leave to their financial planner or adviser. Carlson says he prefers surpluses to build before considering illiquid investments, especially early on (22:08 to 22:35). (at 22:08)
"the premium you put into it every year also stays tax deferred"
Van recalls that during a downturn, some business owners wished they had cash to buy raw materials at a fraction of earlier prices (31:19 to 31:47).
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Frequently asked questions
How do business owners use 831(b) plans to fund business risks?
Van Carlson says some businesses may be able to expense premiums at the operating company and use pre-tax dollars to fund selected risks, depending on the business and plan (8:24). He says the plan can build reserves for deductibles, disputes, supply chain problems, or cyber losses (12:01). He also says pooled claims can affect the plan, so it isn't a complete solution (20:44, 24:24).
What risks did Van mention for medical practices?
Van named HIPAA violations, audits, and expenses tied to dealing with Medicaid and Medicare (15:42 to 16:10).
What did Van compare the plan to?
Van compared it to an HSA, saying individuals accept more out-of-pocket health costs in exchange for expensing that year's contribution (16:10 to 16:37).
Sources
Quotes are copied from the video captions and checked against the transcript. Timestamps link to the moment in the video. General information only, not legal, tax or investment advice.