The article discusses the importance and utility of 831(b) plans in safeguarding businesses against unexpected risks. The plans, part of section 831(b) of the Internal Revenue Code, allow companies to form a captive insurance program and set aside tax-deferred funds to protect against underinsured and uninsured risks.

However, misunderstandings about these plans are common among business owners. If not structured correctly, the IRS may deem the plans abusive, resulting in severe penalties. Expert administration is therefore crucial for compliant usage of these alternative risk financing tools.

Essentially, 831(b) plans are insurance companies owned by the businesses they insure. These plans offer alternative protections that cover gaps left by traditional insurance, helping businesses manage risks more flexibly. Although underwriting profits from these plans are tax-deferred, investment income is taxed. Furthermore, there are several compliance requirements, such as clear risk transfer, risk distribution, fortuitous risks, and upholding insurance principles.