We discuss why you should strongly consider self-insuring your business by leveraging the often-overlooked 831(b) tax code. Van Carlson, a risk management expert with 30 years of experience and Founder of SRA 831(b) Admin.
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Transcription
Introduction to Insurance Industry Challenges
Van Carlson: The unfortunate part about the insurance industry is the one glove off its mentality. The more unique your business is, the more unique services you provide, probably more gaps you have in coverage.
Ben Fraser: So you can put away pretty large sums compared to like other types of tax deferred vehicles. But then, it’s not money that you can ever see or touch or smell or know what’s going on.
Van Carlson: If you need it, it’s a bad day. And you’re going to be thankful you have it. Being a risk manager for almost 30 years now, there’s a lot of things business owners find themselves in all the time. Self-insuring risk. Congress recognized this back in 1986. There’s a magazine cover behind me from Time Magazine that was published in March of 86.
It says, good morning, America. Your insurance has been canceled. And it’s really similar to what’s going on in today’s markets too. Unfortunately, I think a lot of business owners are finding themselves with substantial rate increases, paying more and getting less in coverage. Our clients are very successful people and they’re capable of managing their money.
Welcome to the Podcast
Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast. Got a very interesting episode for you today. This one is something you may not think of. I think you’re interested in it, but you definitely are if you’re a business owner, and this is all about insurance.
Meet the Expert: Van Carlson
Ben Fraser: A little bit of a unique topic, but we brought on an expert, Van Carlson, he’s been in this space for 30 years. He talks about how you as a business owner can self insure almost any risk that you have and put away tax deferred dollars into your own insurance plan that you control. You direct the capital, you can make investments from it, you can borrow against it, and actually get the benefit of it if you don’t use the funds down the road.
And actually it’s pretty tax efficient. So this is a really cool way as a lot of business owners are experiencing a reduction in coverage, increase in premiums, and a lot of challenges getting claims. Definitely want to learn about this. This is a part of the tax code that’s been around for almost 40 years, but a lot of people are unfamiliar with it.
Myself included. I’ve heard a lot today. You’re going to hear all about it in this episode. You definitely want to hear it to the end if you’re a business owner. So check it out. Enjoy.
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Welcome back to their episode of the Invest Like a Billionaire podcast. I’m your host, Ben Fraser. Today. Got a great guest. Super excited about this.
Understanding 831(b) Tax Code
Ben Fraser: Van Carlson’s coming to us teaches us all about 831(b). I figured you probably don’t know what that is, but you definitely want to know and you want to hear all he’s going to share.
So Van, give us a little background on who you are. Give us a little sense of what you and your firm do. And why should we pay attention to this kind of obscure thing that I never heard of until we started talking about it? I don’t know if our listeners have heard much of this. Tell us a little about what you do and what this kind of interesting program is.
Van Carlson: Yes. And hey, thanks for having me on your show. I’m in risk management, that’s the sexy part of business managing risk. I’m the, I was the property casualty agent. That you look forward to seeing every year. And risk management is obviously a key component of any successful enterprise.
You do, that is a necessary thing that you have to pay attention to. Really when we talk about 831(b) that is a Part of the tax code it’s no different than the 401k, right? That’s, you’re just going to find out where you go by the federal tax registration code and you would look that up and see what an 831(b) is.
What an 831(b) is really identifying self insuring risk.
Historical Context and Current Market Challenges
Van Carlson: And so being a risk manager for almost 30 years now there’s a lot of things business owners find themselves all the time, self insuring risk for. Congress recognized this back in 1986. There’s a magazine cover behind me that, from Time Magazine that was published in March of 86, that says good morning America, your insurance has been canceled.
And it’s really similar to what’s going on in today’s markets too, unfortunately. I think a lot of business owners are finding themselves with substantial rate increases. Paying more and getting less in coverage. Very similar to what’s gone on back in the 80s. So really what happened was Congress got together in 1986 and formed an incentive that recognized business owners that were self insuring risk or just simply couldn’t buy insurance for certain situations to give them an incentive.
And that 831(b) allows you to take expenses out of your operating company level. Deduct them and put ’em into an 831(b). The hook there is the 831(b) has to look and feel like an insurance company. So you don’t need an administrator for that. And that’s what we do as no different than a 401k administrator.
You would never wanna administer your old 401k plan. You have to find an administrator for that. You also have to find an administrator for the 831(b) plans as well.
Self-Insuring Risks and Tax Benefits
Van Carlson: So it’s Rick being able to use tax deferred dollars to manage risk in the future. And unfortunately, Ben, the best example I give on that today, and I think it’s is COVID PPP stuff ERC stuff that the government had to step up to plate in, in order to offer business owners a lifeline because traditional insurance companies weren’t going to do that.
They couldn’t afford to do that, truthfully, and they’ll never be able to afford to do that. And so this is really where. We’ve been able to grow our business substantially over the last several years because clients have now realized that they are self-insuring a lot of risk. That’s just, the PPP stuff, hey, I, essentially you’re just gonna be forced to shut down.
You order the customers to stop coming to your, even if you were essential, it doesn’t mean the customers are going to keep coming to your, or your business, right? So that, that’s a big, that was a big, we talked to business owners about that today when we’re out talking around, around the country.
It’s if you were relying on that, this code exists today. You can build up your own PPP plan on a tax deferred basis and rely on yourself going forward. I don’t know what the fee is, I hope the guy never has it. A situation like we had in 2020 but we lived it and it happened. Is it going to happen again?
And if it is, if it will. Then how do you position yourself better in the market? And that’s really what the 8301B allows you to do. And really you’re just taking tax deferred dollars, handling a risk that’s not being insured for. Anything happened, outside of that, all you’re doing is pulling cash flow out of your business to pay for an expense that you weren’t, that wasn’t budgeted for.
Run. That’s where you put the business at risk, unfortunately, in those situations. And that’s something that we’re trying to help around the country. And I really appreciate being on your show because we’re trying to bring awareness out, education out all those things. So clients such as yourself are hearing about it for the first time.
It’s been on the books for 38 years. And, and the reality is a lot of people don’t know about it. The first people that adopted this were really big fortune 500 companies. They have a lot of their own insurance companies. Nobody’s selling them product liability. Nobody’s selling Microsoft.
Product liability, right? When they roll out a new software. It’s, they’re self insuring that. And so they own a lot of insurance companies. And they use it, leverage it in certain ways that gives them, I think, a competitive edge even in the marketplace. If you know what you’re doing. This is where we bring out, this is really when I was traditional insurance leading into 08, when the Great Recession hit, that’s when I really got interested in managing the financial risk business owners take on, not just they’re using traditional insurances to do that with, and that’s really when I, that’s when we started the company and then we have over 800 plans around the country we manage we have a lot of strategic partners that offer our products and we’re on track to double in three years and we’re excited.
Yeah. Where we’re at in this marketplace and really where, the, and really the market’s the one driving it. Traditional insurance companies are finding themselves in very difficult spots right now. Trying to make a profit. The coverage that has gotten so much, 1986, cell phones weren’t even a thing.
Social media wasn’t a thing. Supply chain risk wasn’t really happening. It was just on the cusp of a global economy. And the world’s gotten so much more complicated over the last, those years. And traditional insurance companies are not responding very well to those additional risks for business owners.
Ben Fraser: Yeah. Yeah, I’m super glad we’re talking about this. A lot of our listeners are entrepreneurs. They have businesses. Yeah. And insurance is, it’s something you just have to do, right? It’s what, depending on what business you’re in and you’re paying your premiums. And, we’ve all seen it across probably every insurance line where deductibles keep going up or coverage keeps being reduced.
In our world in real estate, it’s very acute, right? Property insurance has skyrocketed in the past 18 months, especially in certain parts of the country to where you can’t even really get it and get meaningful coverage to where you’re forced to self insure it in some ways.
What’s caused this swing from, like you’re saying, it’s what we saw back in the eighties. Is there just been more claims than normal? Like I know in the real estate side where you have a lot of storms, right? And in the Gulf Coast areas that creates a lot of damage, which creates a lot of outflows of cash from the interest companies and boosts up claims.
But why is this happening across the board and is there just getting squeezed on margins in other ways?
Reinsurance and Market Dynamics
Van Carlson: Yeah, I, a couple things on that first off, reinsurance markets. So reinsurance markets are heavily the best example I talk about is actually 9 11. When 9 11 happened and those towers fell, there was one company with the deck sheet, but there were actually 28 companies that were reassuring that risk in the back room.
Ben Fraser: Explain what a reinsurer is, because that’s.
Van Carlson: Yeah. So reinsurance companies buy risk from an existing insurance company. So it’s one way for them, we call it a fronting company. The frontline insurance company, they’ll take the risk, they’ll issue the policy, but they can sell that risk off to reinsurance companies in the back room.
And that reinsurance company is only buying risk from a company that’s already underwritten that risk. So what that allows their insurance companies to take on, they don’t have, because they’re not issuing risk directly to a customer or to a consumer. They don’t have near the regulations a fronting company would have, so they’re a little bit more, and they demand more, so they demand more on their returns, they demand, and so that’s what’s really happening right now. If you can go out and buy a AAA minor bond, corporate bond, for getting 9-10%, do reinsurance companies really want to take their reserves right now and put it into the market when they maybe can only get 7 or 8 on their returns? Or, a lot of them are looking for 30 percent returns.
So that’s also driving prices up. So even when the reinsurance markets come in, that fronting company is the one that’s passing that additional cost on up that they got to sell that risk to the reinsurance carrier too. They’re passing it on to the consumers. That’s why you’re seeing those big rate increases.
And then at the same time, you’re seeing a lot of exclusions come in at the same time because the reinsurance markets are like, Hey, we want depreciation and risk now. We’re getting so many phone calls out of Florida right now because of what’s going on out there. A lot of things. To your point about exclusions ACV is a serious issue for commercial businesses.
And the other one, the other two big factors is that fact that we’re responding to the market by offering a gap policy today because. You’re insuring your building for X, but it’s going to cost Y to replace. A lot of business owners don’t know there’s co insurance clauses in there. So if you’re not, you’re already taking a substantial rate increase, Hey, I’m really under-insuring my building.
It’s going to cost 5 million. I’ve got 5 million coverage, but it’s going to cost 9 million to rebuild. If you have a claim, it’s going to trigger a co insurance clause inside that, because it’s a bit, it’s the way the insurance company keeps you from. Not really, you might have replacement costs on your building, but they want to make sure they’re insuring it for the proper premium for the proper risk.
And so if the building is underinsured, there’s additional clauses in there that differential hooks to you as a property owner that you’re going to come in with more dollars than you realize. It’s just not going to be deductible.
Ben Fraser: So basically their funds will be contingent on you coughing up your share of whatever the replacement cost is.
Van Carlson: Yeah. And if you, and if the building is deemed to be underinsured at the time of the loss, It’s going to trigger those coinsurance clauses within the contract.
Ben Fraser: Wow. And if you don’t meet those, then they’re not liable for that claim?
Van Carlson: Oh, they are still, but you’re going to feel more of the pain. You’re going to pay more of the claim than you’re anticipating.
So what we’re doing now is, working with commercial building owners, we’re building a gap policy now for that very reason. Because the replacement cost, that’s a moving target today, and unfortunately, Yeah, what you can buy a building for versus what you can replace it for are substantially different too, right?
So those are all things you have to take into consideration and really understand your policy you’re buying because, and we’re seeing a lot of pressure on roofs right now. You get a 20 year old roof on a building, actual cash value minus depreciation. You’re really self insuring that roof. If you got hail damage on it from shingles let’s say, and it’s ACV, a 20 year old roof’s going to be depreciated down to nothing.
And that’s all they’re going to cover you for is the depreciation value. That, that’s that those are risks. Those are lots of risks, unfortunately, that business owners find themselves taking on unbeknownst to them, unfortunately.
Practical Applications and Case Studies
Ben Fraser: So talk a little bit about just some of the mechanics. How are these structured?
You said tax deferred dollars. Is there a limit that you can contribute in a given year? You get the deduction for I believe these are C Corps, right? So talk a little bit about some of the mechanics of how this works.
Van Carlson: Yeah great. Thanks for the question. Yeah. So these are C Corps. We formed the C Corp to get the EIN number, we got all that stuff going, and then we’re doing the underwriting in the process.
That’s what we do. My, I have a team of underwriters that kind of assess The risk and with the premium dollars. So for example, every year, this year, starting this year, you can put 2. 8, 5 million away into this every year. So operating company now, just because you have that doesn’t mean you get to do that, right?
So that’s where we come in and we do some methodology on the pricing, on the premiums, and we’ll always give our clients the ceiling and this is the most you can do. And it’s really driven by gross revenues. So it’s going to be driven by rent receipts. And into the unique risk you might have, when you talk about entrepreneurs, the unfortunate part about the insurance industry, it’s a one glove off.
It’s. Mentality, the more unique your business is, the more unique services you provide, probably you’ll have more gaps you have in coverage because they’re just giving you a boilerplate policy and say, here you go, and I get that too. The insurance industry, you could, I get that.
But then we dive into those policies and start looking for endorsements, looking for additional coverage that really the client wants. And then how do you assess the dollars on that? So what we’re, so then from there. We’re going to do the underwriting. We’ll do the methodology and the pricing to generate the invoice.
Client writes a check, a premium checkout, but to their comfort level whatever that looks like. And again we’re managing that with the clients and then they’re able to expense it out at an operating company level. They send it to us and then we have the EIN and then we push it into their C Corp, the reserves.
That’s a premium. And like I was saying, the biggest thing under the, as long as you could, as long as you meet there’s a four part test you have to add a year or two. There’s some rules and regulations to this thing. Obviously the IRS doesn’t like these things. They’re a benefit to the taxpayer and anytime they’re a benefit to the taxpayer.
Yeah. They have their role to play, right? But there are certain rules and regulations you have to adhere to. And again, as we’re an administrator we’re making sure that those dollars do stay tax deferred. Now, the only thing inside the C Corp that doesn’t stay tax deferred is in realized investment gains.
For example, if a client said, Hey, I want to put a million dollars into this thing. We say, okay, blah, blah, blah, good to go. We put a million dollars into their C Corp. They put it into a bank and have a money market account, for example. And it’s getting 4%, let’s, 5%, 5 percent is easier. It’s 50, 000.
They’re going to pay corporate taxes on that 50, 000. So anytime you have realized investment gains inside this vehicle, You will pay taxes on it. It could be managed by their financial planner and it could be managed. It becomes another bucket of money for the stakeholders. And,
Ben Fraser: That’s a pretty cool point, right?
So you can put away pretty large sums compared to like other types of tax deferred vehicles, retirement vehicles. This is massive. Yeah, obviously there’s qualifications. Like you said, you have to meet different types of companies. But then, it’s not money that you can never see or touch or smell or know what’s going on.
You actually can direct the investment strategy. You can hire someone to help manage it. You can, I believe you can do self directed investments into.
Van Carlson: An investment agreement, which you can and can’t do with the reserves with us. Outside of that though our clients are very successful people and they’re capable of managing their money.
And so this is, look, think of it as like an HSA account too, by the way. I just, one of those, your point, if you can build those HSA plans up and hey, if you’re fortunate enough to not have to use it for medical reasons, it does become another retirement bucket down the road.
And we make that very clear to business owners. That’s really the end game here. That’s the incentive Congress put in place. If you didn’t have those incentives, you wouldn’t do the program. And that, those are things that are long term now, God forbid, if we don’t pull any punches about this, if you need it, it’s a bad day and you’re going to be thankful.
You have it. Basically tax deferred dollars that you put away several years and it’s going to make you. If not whole, at least survive a situation where you’re on your own anyway. And that’s just, that’s really where I got really passionate about this business because the risk takers that are out there how do we manage their risk because we need more of those risk takers, not less.
And so anytime we can help mitigate those risks and really the guys that hurt us okay, they calculate, they’re not reckless about risk, but they’re calculating risk and the reward’s big enough. I’m going to go do this. But can we increase the reward and to even make it more do it or even more and I really think that’s where Congress came into a good on them and in 1986 to have the I guess the foresight to say, yeah, the world’s going to get a heck of a lot more complicated than 1986.
And we keep seeing that, it’s cyber risk alone today, the amount of. Information we collect as business owners and the amount of the responsibility that comes with that and the policies that are being written today are just, they’re meeting contractual obligations, but at the end of the day, are they really covering anything and I hate to say it, but out there, your listeners might be paying a lot of premiums for these policies right now in cyber, but the exclusions that are in them today, Are so substantial that you got to wonder sometimes whether it’s something worth having, you, the person you’re working with is requiring it and so you buy it and then the, then you take the risk of you ever used it would I ever get it again?
And so it’s just a, it’s a very complicated thing right now in the world where intake, and property owners are the same way, do I take on a high enough deductible because do I want to turn a claim in that’s less than a hundred thousand today? You got to do, you got to do some soul searching on that, unfortunately, because you take the risk of being non renewed.
In fact, I would tell you you’re going to get non renewed. It’s that market. A big carrier in Florida just announced a hundred, they’re non renewing. They’re non renewed at everybody and they’re leaving the state and it was a major commercial carrier. It was auto owners and the fact that they were just, those were small to middle market business owners that were really their bread and butter and now they’re scrambling to try to look for insurance.
And unfortunately I don’t know when that’s going to end. I don’t see it, I don’t see it on the horizon right now. When interest rates start coming down, when inflation starts getting, replacement costs go in better, reinsurance companies want to come back to the market.
Meanwhile, we had a hurricane hit the earliest it’s ever hit in Texas just recently and they’re projecting a bad hurricane season this year. So how many more carriers do we, Yeah, insurance carriers are going to, they’re just going to keep doing what they got to do to stay alive themselves, all right?
Ben Fraser: A business owner, obviously, they may have some of these gaps. You structure these policies to where it can cover a multitude of types of risks, right? Where you maybe, you own a building, you can kind of cover a gap there. And maybe you have, Other liability cause you’re a consumer facing business slip and fall type stuff.
It can act as an umbrella type of a policy or you have to have different policies for different types of risks.
Van Carlson: You’d have to have the policy for different types of risk. And the reason why, for that biggest reason is one of the part tests for part tests is distribution of risk. And you can’t participate in risks that you don’t really have as a business owner.
So that’s the best example I give on that is foodborne illness. If you don’t manufacture, distribute or produce food, then you don’t have that risk. And so why would you be in this pool? So that’s why we segment the policies out for the business owners. And in two, we just do a deep dive on the clients and understand what the real risk is, what risk they’re retaining.
Deductible reimbursement is someone that we start to fund for because we got clients that will take on a 10, 20 percent coinsurance clause on the, on property today. If the building’s worth. 10 million. They’re on the hook for anywhere from a million to two, two and a half million dollars.
Those are sizable deductibles that we’re seeing today and that’s really to offset the cost of the premiums and then be able to get a policy. That’s the world we’re finding ourselves in real fast right now. I just met with some people this morning about similar situations they’re having and one can’t even get insurance right now.
They had a claim three years ago and now they can’t even get insurance and the mortgage companies are looking at them pretty strongly. The lenders are looking at them like, what are you, what are we doing here?
Ben Fraser: And so we’re at You structure it as like a single plan with like subcategories of risk, but you have to have different plans for every risk.
Van Carlson: No, we w we would do it like you s the first scenario you mentioned where we would just Oh. It’s, you got one operating company there. We’d underwrite the operating company, look at their different risks and they have, one of the things that we’re seeing right now too is we’re dealing with single payroll policies like in the Midwest where there’s hill coverage.
Hill coverage has gotten very expensive. Always has been. And there’s also huge costs. gaps of actual coinsurance clauses on health coverage. You have a deductible for your fire and your building. It might be 5, 000. If it is a health damage, it might be, you might be on the hook for 30 or 40 percent of the loss.
And so what’s happening in the Midwest right now is we have had a lot of farming, farmers and dairymen right now are deciding to carve out health coverage altogether. Don’t even insure it. I’m not using traditional insurance companies for that. It’s too darn expensive and it’s limited in coverage.
I’m just going to self insure that through an 831(b). So now we’re carving out single parole policies. So a good example would be earthquake areas, where the EMA only has 60 percent of the value of your building insured. I want to buy up from that. Then we’ll form an 831(b) for that. When damage is being excluded in In Florida right now, shockingly so business owners are finding themselves covering wind coverage.
And so as these things happen, how do you mitigate that is, using tax deferred dollars. And in the ideas, you build up the surplus of reserves inside this vehicle, you’re in a much better stable position or, God forbid if those days were to happen.
Ben Fraser: So who determines if an expense is a qualified expense?
That’s where I was or not, but there’s an issue where there’s wind damage, hail damage, whatever on a roof. Is that something that you guys help as the administrator determine, Hey this would be qualifying under the kind of tax code here. Or is there a risk of, hey, I’ve spent money on something with this plan that’s actually not covered under the code, and now I have a penalty or extra liability or something?
Van Carlson: It’s not it’s, think of it as a claims process. No different than any, if you just had a claim on the building. So you’d still have to go through a claims process with us. We still adjudicate the claim, no different. And we actually hire independent adjusters to go out and assess damages, no different than traditional.
When I was talking about distribution of risk is, You’re going to have to share in some of these, some risks that are unaffiliate to you, what that allows us to do though, is it really puts everything in proper procedures where, you, you don’t want to, to your point about a policy and every year.
Shockingly enough, as broad as we try to write policies to make sure we try to capture risk in certain segments oh, supply chain risk is huge for a lot of different industries. Every year we find something that’s good, that’s not covered. And we try to, the next year we try to adjust to that.
But meanwhile, it is a contract, it is a policy and we have to adhere to that. And so to your point, there’ll be times when we have to deny coverage because it’s not simply covered. Or it’s covered it’s far more damage than what the coverage is, but we hit the limit of the policy and it is what it is.
So it’s just no, it’s very, it’s run like an insurance company. That’s one of the parts for the test. The fourth part of that test has to act on principles of insurance. So we make sure there is a proper claims process in place. We make sure that the reserves and Surpluses meet the adequate requirements, reserves in order to be able to honor the claims that you have.
So all those things, make sure that there’s a four part of the policy, that the policy is written in a way that’s actually going to cover something. There’s just all sorts of things that we do as an administrator to make sure we stay in compliance.
Ben Fraser: Yeah, that makes sense.
Eligibility and Implementation
Ben Fraser: And who, who should consider doing this, right?
I’m assuming there’s a threshold of, hey, unless you’re at this level of revenue or have these levels of potential risk, it’s probably better, cheaper, less brain damage to just work with a third party insurer. But when should a business owner start to think about, hey, I’m crossing that threshold to where.
It makes sense to do this or would you say anybody should look into this or where does that kind of start to make sense?
Van Carlson: We’re on a mission to make this a normal business practice. So more business owners know about this too, obviously in the beginning cash is cash and you’re rolling and you’re trying to leverage cash as best you can to grow your business.
And at some point you say, okay, enough’s enough or whatever happens out there in the world of business. But from a gross revenue standpoint, I would say no more, if you’re not grossing more than a million dollars, but then again, it depends on the type of industry you’re in. And I would, quite honestly I hate to say it, but, business owners meet the threshold of pain.
And at some point when you have that threshold of pain, either you’re paying more than you’ve ever paid and you’re getting less for coverage and that’s annoying you that you should look at other ways to, if you’re self insuring risk is there a more efficient way of doing it? And I guess, I try to make it as simple as possible.
You have this risk, you’re self insuring it, do you want to use pre tax dollars or after tax dollars? That’s what, that’s all the code comes down to.
Ben Fraser: And do you want, you’re insuring the risk, you have to either way. You’re either paying premiums and making the insurance companies rich, or you’re paying premiums to your own plan down the road, if you never had to file claims to balance what’s there, you now have extra cash that you have available.
To me it’s a necessary evil, right? That, nobody except the things, man, I can’t wait to pay my premium on insurance, but it’s something where you could actually get more benefit from it and have more control over. What you’re covering and filling gaps and then also potentially get the reward down the road of.
Not needing to file claims against it.
Van Carlson: Yeah, a hundred percent. And like I said, if you need it, you’re going to be very thankful. You got it because it’s not been a good day.
Ben Fraser: I feel like when COVID happened, which was obviously a massive anomaly and shut the world down for a while.
What did that kind of unlock, some like a 31 B plans to help continue business or what was what happened in that? Because in my mind, it’s not how do you insure for an epidemic or pandemic to happen? Could you actually use the funds in that scenario?
Van Carlson: Yeah, we had a 1500 percent increase that year in claims. We actually paid quicker out through claims than the government did especially to restaurant owners and dental practitioners guys that were just, Just wow it right away. And as you build these things up over the years, you had the surpluses, you had the reserves.
We were able to do yeah, absolutely. We saw a huge uptick in claims, but at the same time, we had a huge uptick in interest. We have a lot of CPAs we work with all over the country for referrals and most CPAs, you’re not a CPA, so I wouldn’t expect you to know about this code.
But I’m always amazed how many CPAs I deal with around the country that have never heard of this code. And I’m like, really? You haven’t heard of this code? Are you still a CPA or are you just, what are you doing? Anyway, do you read the notices that come out? But anyway I don’t want to beat up the CPA community too badly.
You’re a good referral source. But no. But my only point is that a lot of people don’t know about this thing and even CPAs don’t know about this. And when it came out, we’ve talked to a lot of CPAs over the years, so when COVID hit, they all of a sudden got it.
They’re like, Oh, I get what you guys are doing.
I don’t want to make it sound like a rocket ship, but to some people that don’t like insurance, that don’t, that, that think of it as, and I get all that, trust me. This is something you got to think about a little bit and say, is this good for me? Is this right for me? And I would say the bigger the risk you are, the bigger risk taker you are. This thing’s going to be right up your alley.
It just is. It’s just your appetite for risk is substantial enough to where you say, you know what, I’m, and I’m dealing with almost weekly now where somebody’s self insuring their building. And I’m like, what? 100 percent of it. Yeah. Wow. Yeah, because they’re looking at the cost.
They’re like, hey man, this is eating into my rent so much. I can’t pass it on to my tenant anymore. These big rates increase on a triple net.
Ben Fraser: In that scenario, my first thought is did, what did the banks think about that? Because banks want to make sure they view it as qualifying.
Van Carlson: Yeah, to your point, these are cash, these are businesses that are paid, these are buildings that are paid for. So to your point, yeah, you can’t mortgage. Now, they’ll force place insurance on you. And what’s interesting about that, and I’ve had this brought up a couple times, is that it might be as cheap in the first place as insurance the banks give you, rather than buying a policy out in public.
Ben Fraser: The self insured pay first place might actually be cheaper than paying. That’s interesting. I’ve heard some of that, but yeah.
Long-Term Benefits and Tax Strategies
Ben Fraser: So what happens, let’s say things worked in your favor down the road. You got a pile of money in this account. Now you’re retired from the business.
You sell the business. What happens? How do you, can you access that? Do you just write a big check to the government and say, Hey,
Van Carlson: The cool thing about it is yeah, you, we’ll allow you to keep it up to three years after you sell the business or you don’t see risk into it. We’ll allow you up to three years.
A lot of our business owners end up buying another business, ironically enough. So they’ll, but we’ll let them stay open for three years. But however, this is a C Corp. You are a shareholder. So you would redeem the shares. They come out of capital gains. Or you can move it into a holding company or anything like that.
We don’t participate in those things. It really depends on what the client wants to do. But the reality though is it’s a distribution on our end. If they say, Hey, let’s close it down. And it comes out of capital gains, long term capital gains, which is I in, in, in.
Ben Fraser: I think that’s second part of my question is from a tax standpoint, it actually seems pretty favorable, right?
Cause if you’re contributing dollars. Tax free and at ordinary income rates, you would normally be paying, higher than capital gains rates. And so obviously with C Corps, you have double taxation, but it’s only at distribution, so when you actually redeem membership shares, is it a better scenario from a tax standpoint?
Am I thinking about that right?
Van Carlson: It’s a tax arbitrage, right? So yeah, we have clients that do that, right? Instead, they’ll take a distribution every year out of their C Corp 831(b) plan. And we’ll actually, we’ll force a distribution too if they’re not having claims by year four and five and they’re funding, max funding based on our methodology, we’ll require them to take a distribution if they want to keep funding.
Right now, to your point, they went. Relative to our fees, the client still wins because of the double taxation. The double taxation is only on investment gains, realizable. good. Yeah, and the bulk of the premium is staying tax deferred, so when they pull it out through a dividend, that’s really the first time that money’s being taxed.
They had bad people get a calling man. I like this. This is cool. Yeah. What’s the reason for that? I think that’s really the long term planning strategies in the back room. They can work with their financial planners or advisors or trusted advice in this, and do what big businesses do.
Big business has been doing this for a long time and they’ll continue to do it. And I am just trying to, like I said, the risk takers, the entrepreneurs out there that are, Taking an idea and running with it and turning it into a profitable company. It’s not easy to do. And how do we make the most of that?
And it’s utilizing tools like this.
Ben Fraser: Very cool.
Conclusion and Contact Information
Ben Fraser: What’s the best way for people to learn more about what you do and more about this cool part of the tax code?
Van Carlson: Yeah. Https://www.831b.com/ is our website. We were lucky to get that years ago. Nobody knew, we took advantage of knowing, not knowing about it.
And I would start there. You can always reach out to me, van@831b.com. That’s V A N at a 31 b dot com. I’m happy to put you in touch with any strategic advisors around the country where you may be. And we have about 120 currently around the country. And then, like I said, I have a really good sales team here and.
Our whole process of this thing and it’s like anything else when it comes to sales and education first and see if it’s good for you or not good for you. I think every business owner out there should be looking at every tool there’s available to them. And that’s all this is another tool and it’s not a silver bullet.
It’s not that sexy it’s a it’s risk management But I think it’s a great advantage to business owners when they look at it the right way
Ben Fraser: Very cool. Man, thanks so much for coming on, sharing your wisdom on this topic and it’s definitely interesting. I’m sure a lot of our listeners will get some value from it.
So thanks so much.
Van Carlson: Thank you. Appreciate it.
Ben Fraser: This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics, and interview successful investors.
