CASE STUDIES
SRA 831(B) CASE STUDIES
Small and mid-size businesses are the lifeblood of the American economy. The 831(b) Plans offered by Touchpoint are meant to ensure these businesses conquer the storm. Our clients and their businesses financial security are our primary focus. Our talented and motivated team strives to provide creative, quality, well-designed plans to address the varying needs of the clients we serve.
PRODUCT GUIDE
4 PART TEST
GLOSSARY OF TERMS
A test outlining the threshold requirements of an 831(b) Plan to qualify under the 831(b) tax code. The test consists of four parts: 1) risk transfer, 2) risk distribution, 3) the plan mitigates fortuitous risk, and 4) the plan acts within the usual principles of insurance.
An 831(b) plan administrator makes sure that 831(b) Plans follow the rules and help companies save for risk mitigation. Administrators work with legal documents, perform analyses and tests, and monitor plan operations.
A tax-deferred savings plan that allows a business owner to divert a portion of gross revenues to self-insure risks that are either uninsured or underinsured. Plans must meet a four-part test to qualify under the 831(b) tax code. Plans are usually managed by a third-party administrator to ensure compliance.
A type of 831(b) Plan that allows participants to avoid participating in a risk co-op with unrelated parties in order to meet the risk distribution requirements of the Four-Part Test. If an 831(b) Plan includes a safe harbor provision the participant’s customers/clients, commercial property, and/or employees and contractors meet the threshold requirement for risk distribution.
A C-Corp in which 831(b) Plan funds are held. The company is allied with other ARC’s in a risk co-op that shares each other’s risk under a treaty reinsurance agreement. Like a 401(k) account, an ARC has distribution rules as well as annual contribution limits.
The minimum interest rate that the Internal Revenue Service (IRS) allows for private loans. Each month the IRS publishes a set of interest rates that the agency considers the minimum market rate for loans. Any interest rate that is less than the AFR would have tax implications. The IRS publishes these rates in accordance with Section 1274(d) of the Internal Revenue Code.
Premiums paid or payable by an insurer to another insurer for reinsurance protection.
A formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim (or denies the claim). If the claim is approved, the insurance company will issue payment to the insured or an approved interested party on behalf of the insured.
The amount of reimbursement premium retained by a direct writer in a reinsurance transaction usually in proportion to the premium falling under the CLIP. Also referred to as a ceding fee.
A reimbursement policy that covers the liability of the insured assumed in a contract e.g. service contract, warranty, sub-contractors, etc.
An insurance company that initially underwrites the risk, and then, may transfer the insurance it has written to another insurance company or reinsurance company.
The location or venue where a company is licensed to do business.
A plan-based business strategy that aims to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster that may interfere with an organization’s operations and objectives.
The formal document between the ceding company and the reinsurer that details the contracts ceded for facultative reinsurance.
Reinsurance transacted on an individual risk basis. The direct writer has the option to offer an individual risk to the reinsurer and the reinsurer retains the right to accept or reject the risk. When the reinsurer accepts the risk. When the reinsurer accepts the risk, the reinsurer is responsible for the first dollar claim of up to the agreed-upon percentage of the total underlying coverage.
An American Indian or Alaska Native tribal entity that is recognized as having a government-to-government relationship with the United States, with the responsibilities, powers, limitations, and obligations attached to that designations. Federally recognized tribes are recognized as possessing certain inherent rights of self-government. Federally recognized tribes possess both the right and the authority to regulate activities on their lands independently from state government control.
An event happening by chance or accident. It is an occurrence or failure to occur which is or is assumed by the parties to be adversely affected by the happening of such an event.
An arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.
A company that makes a good or provides a service that it then sells to customers or clients.
A risk that is likely to occur during the ordinary course of business and not fortuitous in nature.
The 2015 Protecting Americans from Tax Hikes Act that increased the 831(b) annual premium limit from $1.2 million to $2.45 million and further indexing the amount to inflation. In addition to premium increases, the PATH act also provided specific language preventing 831(b) plans from being used to avoid estate tax planning by requiring a plan to mirror the ownership of the participating companies.
The portion of an insurance company’s reserves consisting of unearned premiums.
Generally accepted characteristics and functions of insurance including contractual transfer of risk, utilization of the law of large numbers to distribute risk amongst many insureds, a defined claims process to determine covered losses, and managing reserves to generate investment income.
A type of dividend subject to capital gains tax rates that are lower than income tax rates applied to ordinary dividends. Generally, dividends from shares in domestic corporations that have been held for at least a specified period of time.
Described as insurance for insurance companies. When multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster.
An agreement by which one insurance company transfers risk to another (buys reinsurance). Unlike an insurance policy, both parties sign a reinsurance agreement.
That portion of a risk that a direct writer transfers to a reinsurer in return for a stated premium.
Premiums paid or payable by an insurer to another insurer for reinsurance protection.
The amount of premium retained by a direct writer in a reinsurance transaction usually in proportion to its liability retention. Also referred to as a ceding fee.
A group (pool) of ARCs united voluntarily to meet their common economic needs by sharing each other’s risks on a pro-rata basis.
The utilization of the law of large numbers which allows an insurer to reduce the possibility that a single claim will exceed the amount taken in as premiums.
Occurs when a person/operating company facing the possibility of economic loss transfers some or all of the financial consequences of the potential loss to the insurer, such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer.
A test outlining the threshold requirements of an 831(b) Plan to qualify under the 831(b) tax code. The test consists of four parts: 1) risk transfer, 2) risk distribution, 3) the plan mitigates fortuitous risk, and 4) the plan acts within the usual principles of insurance.
A safe harbor is a provision in a law that affords protection from liability and/or penalty when certain conditions are met.
A legal instrument in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms, including the interest rate to be paid.
A measurement of an insurance company’s ability to meet its policyholder obligations.
The portion of an insurance company’s reserves consisting of earned premiums generated from underwriting profits and investment income earned on premium reserves.
Not taxed until sometime in the future.
A transaction covering a block of the direct writer’s book of business. The reinsurer must accept all business included within the term of the reinsurance agreement.
Earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on premium reserves.
TAX RESOURCES
Safe Harbor Ruling – 2002-89 (50% Unaffiliated Risk)
Safe Harbor Ruling – 2009-26 (Recognized Insurance under 831b Tax Code)
Private Letter Ruling – 200950016 (Recognized Pro Rata)
Private Letter Ruling – 200950017 (Recognized Pro Rata)
