Journal of Financial Planning: June 2025
Van Carlson is a visionary risk management strategist and pioneering expert in 831(b) solutions. As founder and CEO of SRA 831(b) Admin (www.831b.com), Van drives the company’s growth and strategy, focusing on educating business owners and trusted advisors about the benefits of 831(b) plans. Prior to founding SRA, he ran his own property and casualty firm for 15 years, earning top accolades, including Presidents Council honors. Van holds a bachelor’s degree in political science and government from Boise State University.
The insurance industry has a long history of crises that lead to skyrocketing premiums, dwindling coverage, and businesses left scrambling for protection. This cycle of insurance hardening has played out before—and we’ve seen its consequences.
In 1986, as insurers pulled back from offering liability coverage, businesses faced an unprecedented crisis. The Time magazine cover story from March 24, 1986, detailed the fallout: entire industries, from daycare centers to municipalities, were struggling to find or afford insurance.1 In response, Congress introduced 831(b) plans, a tax-advantaged tool allowing small- and mid-sized businesses to self-insure against risks traditional policies wouldn’t cover.
Just two decades later, in 2005, the market was again in turmoil. This time, the crises stemmed from natural disasters, notably Hurricane Katrina, which triggered a spike in claims and left businesses—especially small- to medium-sized ones—dealing with canceled policies, astronomical premiums, and policy exclusions. For many, it felt as if the industry was once again retreating. While 831(b) plans continued to provide an alternative, their potential was often overlooked, leaving many businesses vulnerable to risks no longer covered by traditional insurance.
Unfortunately, decades later, reading back through these moments it feels as though they could have been written yesterday. We are witnessing yet another wave of insurance hardening. Rising premiums, stricter underwriting, and the growing unpredictability of risks—cybersecurity threats, reputational crises, and business disruptions—leave many businesses exposed. Yet, 831(b) plans remain an underutilized tool, one that financial planners can leverage to help clients build resilience in the face of today’s insurance challenges.
Understanding 831(b) Plans
In times of insurance market hardening, businesses often find themselves at a crossroads. The rising premiums, shrinking coverage, and growing exclusions can stifle growth and innovation. After all, it’s difficult to invest in new projects, expand into new markets, or experiment with cutting-edge technologies when the financial resources are constantly redirected to meet higher insurance costs. Without adequate coverage, many businesses feel forced to scale back their ambitions, limiting their ability to take risks, innovate, and stay competitive in a rapidly evolving marketplace.
An 831(b) plan, a self-insurance arrangement also known as micro captive insurance, allows businesses to set aside tax-deferred funds to cover risks that traditional insurance policies may not fully address. Similar to how the 401(k) tax code allows employers to set aside tax-deferred dollars for retirement, the 831(b) tax code enables businesses to reserve tax-deferred funds for underinsured or uninsured risks, such as business interruptions, cybersecurity threats, reputational damage, supply chain disruptions, product recalls, and legal liabilities.
Under the 831(b) tax code, small- and mid-sized businesses can create a self-insurance company that pools risks and provides coverage for these areas that are typically excluded from traditional insurance policies. Premiums paid into the plan are deposited into the self-insurance arrangement, and businesses are taxed only on investment income, rather than premium income. This tax deferral provides businesses with a secondary advantage, allowing them to allocate more capital toward managing their risks.
An 831(b) plan provides a long-term financial cushion that can be tapped into when unexpected liabilities arise. The self-insurance structure also allows businesses to customize their coverage to fit their unique needs, giving them more control over coverage levels and premiums. In addition, by self-insuring, businesses may reduce their reliance on traditional insurers, which could lead to lower premiums in some cases. The funds within the self-insurance arrangement can be reinvested, potentially generating growth that helps the business manage future risks more effectively.
Businesses can cover a broad range of risks with an 831(b) plan. For example, during the California wildfires, many businesses found that their fire insurance only covered physical damage to their buildings. However, if their building remained intact but the surrounding area became uninhabitable due to temporary evacuations or because nearby properties had burned down, traditional insurance did not cover the loss of income or other disruptions. In this case, an 831(b) policy could cover business interruption, ensuring that the business remained financially protected even if its physical location was unaffected but its operations were severely impacted by the surrounding circumstances.
Overall, an 831(b) plan offers a way for businesses to build resilience against unpredictable events, providing financial stability and peace of mind as they navigate an increasingly volatile risk landscape.
When Is an 831(b) Plan Appropriate?
An 831(b) plan can be an ideal solution for small- to middle-market businesses that need a customized way to mitigate risks not typically covered by traditional insurance policies.
Unlike traditional insurance, which may not cover certain types of losses or come with strict exclusions, an 831(b) plan allows businesses to reserve funds for catastrophic events. This is particularly relevant when business owners need to self-insure risks like lawsuits, product recalls, warranties, or supply chain issues, where traditional insurers may limit coverage or exclude certain events from policies.
Nearly every industry, from professional services to manufacturers and many more in between, utilize 831(b) plans. However, businesses that are especially impacted by the uncertainties of today’s economy, such as those in high-risk industries or those located in areas vulnerable to natural disasters, benefit the most from an 831(b) plan. These plans help address risks that may not be well-covered by standard policies, such as impacts from wildfires that result in business interruption, as discussed earlier.
Additionally, an 831(b) plan offers business owners more control over their risk management. By tailoring coverage to meet specific business needs, owners can address gaps in existing policies and design a plan that fits their unique financial and operational circumstances. Unlike traditional insurance, where premiums are often dictated by the insurer, the 831(b) plan allows business owners to set their premiums based on a risk assessment through collaborative efforts and financial capabilities.
To ensure compliance with the 831(b) tax code, businesses must meet a stringent four-part test, based on Rev. Ruling 2009-26 and recent court rulings.2 The first part of the test is risk transfer, which requires a contractual transfer of risk from the business (operating company) to the insurer. This is typically achieved by using a “direct writer” who underwrites the risk and issues policy contracts to the business in exchange for premium payments.
The second part is risk distribution, which ensures that the risk is spread across multiple, unrelated participants, reducing the financial burden of a single catastrophic loss. This is accomplished through the law of large numbers, where risk is pooled among businesses in co-ops or other arrangements.
The third part, fortuitous risk, stipulates that the risks covered must be accidental, unforeseen, or unexpected, rather than routine business risks. The 831(b) plan is structured similarly to traditional insurance, where coverage is meant for fortuitous events, such as business interruptions or supply chain disruptions.
Lastly, the plan must adhere to insurance principles, meaning it must operate in accordance with generally accepted insurance practices. This includes clearly defined methods for determining premiums, a structured claims process, maintaining reserves, and ensuring the plan’s solvency to cover claims. By fulfilling these four requirements, an 831(b) plan remains compliant and can offer tax-deferred contributions while helping businesses manage risks not covered by traditional insurance.
In summary, an 831(b) plan is most appropriate for businesses that are ready to take proactive control of their risk management strategy, especially when traditional insurance options fall short or fail to cover critical risks. Whether looking to mitigate unforeseen interruptions, safeguard against cybersecurity breaches, or protect against the financial fallout from natural disasters, an 831(b) plan offers a flexible, tax-efficient way to build resilience and long-term stability.
Practical Steps for Financial Planners to Evaluate Suitability
Financial planners play a critical role in evaluating whether an 831(b) plan is a suitable option for their clients. The first step in assessing suitability is to understand the client’s unique risk exposure. This involves reviewing the client’s existing insurance policies to identify any gaps in coverage—especially in areas like business interruption, supply chain risks, cybersecurity, and other liabilities that traditional insurance may not fully address. Financial planners should also consider the client’s overall business model, industry, size, and financial goals, as these factors will influence whether the 831(b) plan is a viable solution for managing risks.
Once the need for an 831(b) plan is established, the next step is to work closely with other professionals, including a seasoned 831(b) plan administrator. This plan administrator will help assess the types of risks that could be mitigated through a self-insurance strategy, ensuring that the plan’s coverage aligns with the business’s needs. They are also essential in ensuring the 831(b) plan is set up and maintained in compliance with tax laws and regulations, including the four-part test.
Additionally, educating clients about the long-term benefits and responsibilities of an 831(b) plan is crucial. While an 831(b) plan can offer significant advantages, such as tax-deferred contributions and greater control over risk management, clients need to understand their ongoing responsibilities. These include managing reserves, adhering to the principles of insurance, navigating the annual contribution limits, and solvency testing. A clear understanding of these responsibilities will help clients maximize the benefits of their 831(b) plan while avoiding potential compliance issues down the line.
By following these steps—assessing risk exposure, collaborating with the right professionals, and providing ongoing education—financial planners can help their clients successfully implement and benefit from an 831(b) plan.
Conclusion
We would all like to think that in another decade or so, we won’t be having the same discussion surrounding a hardening insurance market and the toll it is taking on small- and mid-sized businesses. Unfortunately, history seems to suggest that we will be doing just that. Fortunately, financial planners have an opportunity to guide their clients toward more resilient solutions.
Just as 831(b) plans helped businesses navigate past insurance crises, they can serve as a useful tool today in addressing the rising costs and unpredictability of traditional coverage. Financial planners are uniquely positioned to help clients not only understand these options but also implement strategies that protect their business long term. By evaluating risks, collaborating with experts, and educating clients on the responsibilities and benefits of self-insurance, financial planners can steer their clients toward smarter, more sustainable solutions—helping them build resilience against the inevitable cycles of insurance hardening.
Endnotes
- Church, George J. 1986. “Nation: Sorry, Your Policy Is Canceled.” Time. https://time.com/archive/6673609/nation-sorry-your-policy-is-canceled/.
- Glover, John E. 2009. “Section 831.--Tax on Insurance Companies Other than Life Insurance Companies Rev. Rul. 2009-26.” Internal Revenue Service. www.irs.gov/pub/irs-drop/rr-09-26.pdf.