#139: What is an 831(b) and How it Can Protect Your Business
LISTEN AND SUBSCRIBE
Apple Podcasts | Google Play | Stitcher | Spotify
Want to grab the transcript of this interview? Click here!
Welcome back to another episode of the richer geek podcast. Today, we're going to get into some strategic risk alternatives as far as you know, helping us save some money for those unexpected times, our guest Clay Ogden, in his role as National Business Development Manager, he does it all as he interacts with business owners and advisors to identify risk management strategies.
In this episode we’re discussing…
[1:38] Why is it important to set aside excess funds?
[4:05] Managing the risks of insurance
[8:48] How to pull capital back into the business?
[11:06] What are the tax implications of captives?
[14:58] There’s no right way to do this
[16:52] Is this just a tax shelter?
[21:16] The fee structure of the program.
[22:41] What is a retain liability fee?
[26:23] Clay’s advice for small business owners.
Resources from Clay
SRA 831b | LinkedIn | Facebook
+ Read the transcript
Mike Stohler
What if you could be doing something smarter with your money that creates income. Now, if you're wanting to get ahead financially, and enjoy greater freedom of choice, if you want a comfortable retirement, and you know, you'll have more choices, if you can do more with your money. Now, if you've wondered who else is creating ways to make their money work for them, and you want actionable ideas, with honest pros and cons, and no fluff. Welcome to the Richer geek podcast, where you here helping people find creative ways to build wealth and financial freedom. I'm Mike Stohler. And in this podcast, you'll hear from others who are already doing these things, and learn how you can too.
Everybody, welcome back to another episode of the Richer geek Podcast. Today, we're going to get into some strategic risk alternatives as far as you know, helping us save some money for those unexpected times. You know that, especially what we've gone through the last three years, but I'm excited to get in and talk a little bit about with this with a Clay Ogden. There's Ogden or Ogden, Ogden Ogden, and he is the plan administrator. And if you ever one wants to look, it's 831 b.com. We're going to talk a little bit about 831 B's if you can imagine that and how you doing
Clay Ogden
but I'm fantastic. Thanks for having me on.
Mike Stohler
Absolutely. So, you know, take us back a little bit about why this is important. You know, we've all had business interruption, my God, you know, ever since you know, late 2019, early 2020. So give us the rundown on some of the risks that you're seeing and why it's very important to do something like this.
Clay Ogden
Yeah, so I mean, some of the some of the things that we work with business owners in any and every industry that you can think of, we have clients around the country, and they're, you know, essentially what the A 31 B allows the business owner to do is to take excess revenues excess funds out of their business, and set it aside into their their a 31. B, the reinsurance company. In doing so all the funds that they set aside become tax deductible to their business in the year they contribute them. Well, now we're to legitimize those funds being set aside, we're now issuing policies for the uncommon, unforeseen, uninsured risks in a business, as you said, the business interruption type stuff, right. I think every business owner now realizes that there's a lot of gaping holes and a lot of things that they're left to cover. And, you know, the the business interruption type policies are essentially, they're very costly to a business, especially when cash flows dry up, and expenses continue. That's a, that's a, that's a bad day. And so we work with business owners to allow them to take those excess revenues, set them aside to now manage these very same risks that they're they're owning, they're self insured right now, right? So we're set those excess funds aside into an 831. B, to now manage those exact same risks more efficiently. Right, we start looking at things like brand and reputation damages, a business interruption type policy, political risk events, political decisions being made that ultimately have a big impact on a business, supply chain interruptions, audits, disputes brought against the business data breach issues with ransomware and phishing. We start looking at all these various policies that ultimately come back to the business owner to bear the brunt of and technically self insure right now. And so if there's a more efficient way to handle those very same risks, that's what this is for.
Mike Stohler
Now, given that you've seen a lot of risks in the last three or so years, is it all inclusive, you know, the things that I run into sometimes with insurances? Oh, wait, yeah, well, that's not covered. Or this is, you know, the fine print and things like that. Is there anything that you know, I set up an e 31. B, everyone knows that I own hotels. Someone comes riots crashes through and you know, it closes me down for a couple months or another type of COVID Or is it what is business interruption? You know, I know you had some of the stuff but is everything covered? or is it for some just the major stuff?
Clay Ogden
No, I mean, it would it would be to any business that's had a decrease in revenues to an event outside of their control, right? Whether that's a an act of God. Maybe a good example is the hurricane in in Florida a couple weeks ago, right? There's, there's a very real possibility, there's a lot of those businesses are still standing, like their business, it's essentially wasn't taken to the ground. But everything around them is decimated, everyone is rebuilding every one has displaced from their home or their business, they're going to have a loss in revenue, this quarter, due to that event, their business didn't get wiped out. So they don't really have a way to file a claim. But they are going to lose revenue. And that's just something as a business owner, every one that owns a business knows that that's just a, quote unquote, part of doing business and you just deal with it. Right? Well, there's a better way to manage those those same risks, right. And that's to be able to set those funds aside to build up a reserve, or have policies in place to now manage those types of issues if and when they come up.
Mike Stohler
And do you have to? Can I just pay into this insurance? Do I have to create? Or are you guys the like the Captive Insurance Company? Or do I create something to put into it?
Clay Ogden
No, it's a great question. So I mean, anytime we bring on a client, we're going to set up the 31 B for them, we're going to manage it for them, we're going to do all the tax returns, the annual filings, anything like that we're going to dictate or tell them what they can set aside. So under the 31, B, you can set aside up to 2.4 5 million per year, based off of gross revenues. That's the ceiling the maximum amount into an 831. B, we will allow up to 10 to 15% of gross revenues. That can be set aside.
Mike Stohler
Okay. Yeah, that's that's the other question. I was going out what happens? In five years or 10 years? I've got all this money. And then and I get out the hotel business or there's nothing can I get that money back? Or how does that work? Get alone?
Clay Ogden
Yeah, absolutely. So the funds that you're setting in there, right, you're setting into your own A 31 B, they're going to be in an account in the name of your own A 31 B reinsurance company. The funds that are not used for claims purposes, they remain inside your 831. B, they're being deferred. When those policies are issued, those policies oftentimes are going to be 12 month periods of times, just like a homeowner's policy. Right. We issued a policy now for November, one ending on December, or October 31 of 2023, that 12 month period of time, the funds that you put in now we're going to be at risk of a claim while that policy is in place, once that policy expires, those dollars now earn out or become surplus. And now you can yes, you can absolutely take dividends out of their dividend those funds back to you as the shareholder. And now either taking those out as a long term capital gain, instead of ordinary income, you have the option to borrow from or take a shareholder loan or line of credit from those dollars that are now available, you can borrow up to 65% of those dollars. And then any principal and interest payments on that, that loan are going to be actually made back to your own reinsurance company. But yeah, in the meantime, you're absolutely going to have risk coverages in place to now manage these risks, that, you know, if they come up, it's never a great day. But if you have the ability to pull those funds back into the business, to level cash flows, if and when needed. A lot of our clients have had that's that instance over the last few years, and it's been a it's been a game changer.
Mike Stohler
And like 501 C's do it is it just public is what is anyone can do it if you if you have a small business.
Clay Ogden
Tip typically these programs have been used by Fortune 500 companies, large enterprises for the last, you know, 3040 years, we've built our program to work with the small to mid market business owner. So they have access to these these very same planning tools that the large companies have been using for decades.
Mike Stohler
And is there a such thing as like a group captive company? If I own if I'm involved in a franchise owned five different Choice Hotels? Is it something that I have to do individually or is it something that there's also some like group that we can kind of pull our money together or even if they're like non related organizations, but is there? Is there such thing as like a group?
Clay Ogden
Potentially, yes, there is different scenarios there where we could look at something like that. Typically, a group captive is actually going to be utilized for things like work comp, General Liability property, auto coverages when those premiums are pretty substantial. But otherwise, you know, the, this will absolutely be applicable for anyone who's involved in in a scenario like that. But they have their own revenues from their own businesses that they own. And a lot of times, those are those revenues are flowing to maybe a Holdings Company. And then that Holdings Company and all the other businesses they own are now the insurance under policies that they own. The benefit there is the fact that now that it's owned by you, and you're not part of a group, is when you want to take dividends, you want to take loans, you want to put funds in, you have the ability to do that. And it's not dependent upon a group to make that okay, or not. Okay.
Mike Stohler
Okay. Yeah, that's kind of what I was trying to get at is, you know, if you're a very small business, you may not be able to 14, you know, it's, I put in 10%, gross, my gross isn't that big, but, you know, collectively, maybe we can get into a plan where we kind of share it. I understand, we may not be able to take it out. But, yeah, that was a it's a very interesting now. The government loves to regulate. What are you seeing in the future? You know, today's election day, everyone, you know, the, it's the eighth of November when this is being recorded? So depending on what's going on, and you know, with the regulations, what are you seeing down the road? Any changes, anything that we need to know about? As far as people wanting to tax it now, you know, or taxed differently when you get it out?
Clay Ogden
No, not necessarily. I mean, capital gains rates have been the same for the last 40 something years, and this has been a piece of the tax code since 1986. It's very well entrenched at this point in time. There's, like 90% of fortune 500, companies utilize captives, they use these types of programs. So it's becoming a much more used, or I guess, leaned on capability for those small to mid market business owners to now manage those risks that a lot of them are identifying that they have. And if they have the ability to have some excess cash flows in given years, you know, this is it's not a fit for everybody. But it is something that a lot of business owners absolutely should look at as a as a planning tool. So it's, I mean, it's a it's a risk management vehicle, first and foremost, that provides some tax efficiencies along the way.
Mike Stohler
And is always considered like a long term, even though let's say, I go with you and boom COVID hits this winter. And I haven't paid into it for a year or you know, two years. Is that always considered a long term?
Clay Ogden
Yeah. So anytime, anytime premiums are paid, policies are issued, right. So if we, if we have a client that's putting premiums in now, and we issue policies for the next 12 months, those policies are in place for the next 12 months, next year, when we go to renew those policies. And maybe they've had a down year, for whatever reason, they decide not to fund any premiums into their a 31. B next year, they wouldn't have any coverages for the next 12 months. Right? So kind of like having homeowner's insurance, or auto insurance. You know, if you pay it, you have coverage. But, you know, if you if you get in the wreck, now's not the time to go buy the insurance, it's already happened.
Mike Stohler
Right? So what kind of people are always trying to take advantage of this, you know, I'm always kind of looking at what kind of fraud or something that you know, you guys are seeing or abuse for these type of policies for people to sit there say, Look, don't do this, because the IRS might sit there and say, Hey, wait a minute. You know, we need to look into this. So is there any type of abuse that you're seeing, you know, that we need to pay attention to?
Clay Ogden
Athan Excellent question. I'm glad you brought it up. So there's, you know, since it's been around for so long, there has been a lot of abuses that have gone on, right. It's something that's been around for a long time now. And like most every Think there's a right way to do it, and there's a wrong way. And some of the abusive scenarios that have gone on for sure over the last 2030 years is, you know, client or business owners over funding relative to the risk that they have or the revenues that they have. You know, there was a court case that came out about three and a half years ago now. And the client funded 70% of their gross revenues into their a 31. B. I mean, it seems like common sense that you're no longer managing risk, you're simply sheltering dollars, right. And so it's those kinds of things. It's the we've we've seen insurance managers out there that have allowed clients to pay premiums in December, they backdated policies to January of that year, and those dollars now become that surplus or earned out that we talked about in three or four weeks time, in January, because they claimed that they were, you know, they had policies in place all year. That's, I mean, that is very fishy, it is very much common sense. You don't do those things. And so under the 31, B, there's what's called a four part test, you have to have a transfer of risk, you have to have a distribution of risk, it has to be fortuitous types of risk. And then the last one is making sure that you're following the principles of insurance, making sure that you have policies issued that have policy language, stating what's covered what's not covered, utilizing the law of large numbers. That's everything that we do on our side. And so we you know, we take a very conservative approach to the 31 B, simply because, you know, we really like what we do. And we love working with business owners in every arena to help them run their businesses more efficiently. So,
Mike Stohler
yeah, cuz it seems like some people would say, Oh, hey, this could be just another way for me to do a tax shelter. You know, if they're, you know, if they're not careful, it's like, go on. Yeah, I can take how many different types of buckets can I pay into? And use it as like a tax shelter? So is there any that type of stuff that we have to worry about? Or is it I know, it's a legitimate tax shelter, it does that, but it's for a certain type of function.
Clay Ogden
100%. So I mean, there's, you know, the IRS is, they're actually trying to clean up the abusive scenarios that have gone on. And so one of those was, they had a client that set aside 70% of revenue, they filed a claim, the insurance manager approved it, they pulled the money out of their business accounts, it wasn't sitting in their captive accounts, or their 831. B accounts, they had an employee signed for it. It's those kinds of things, that that's not how this works inside of this program, you're sending the premiums to our frontline insurance company, our direct rider, our direct rider is going to issue you policies, just like you were paying premiums to State Farm or travelers or Zurich.
Mike Stohler
And, but it's not and I want to tell, make sure our listeners know, this is not a type of life insurance that you're putting into completely different.
Clay Ogden
Yeah, it's a it's basically a way to take those, you know, reserves from the company side into another separate entity that we're going to form for the client, we're going to manage for the client, and anything and everything related to that 831 B, is what we're going to do as the 831. B administrator.
Mike Stohler
And how much control do would I have? Or how much control do you guys have? As far as you know, that policy or maybe filling gaps in the policy? You know, how much control do I have?
Clay Ogden
The we're going to work with the client to make sure that, you know, I was actually on a call earlier this morning, talking with a business owner discussing some of the risks that keep them up at night, some of the things that simply aren't covered by their insurance. And we were talking through those scenarios talking about what what policies they have now and what policies we currently have that would help fill those gaps are covered those unnecessary, those uninsured risks. And if there's any, you know, endorsements we need to put on those or maybe something that we need to tweak to make sure that we are covering those those uninsured risks in the business. And so those are things that we collaborate with, with the client on to make sure that yeah, we're setting dollars aside to cover real risks, because at the end of the day, that's what this is for. If those funds aren't used for claims in that policy period. It's totally fine. I mean, there's But not everyone, you know, if you if you knew you were going to have a claim, no one would insure you for anything. But if something comes up, it's nice to know that it's there when you need it.
Mike Stohler
And, and that's, that's what's important. Now, if I have four or five different hotels or four or five different McDonald's anything, do I? Is it the holding company that does the insurance? Or does each franchise have it? How does it work? As far as do I need five policies? If I have five different four storefronts, or just one big one?
Clay Ogden
That's a good, good question. So we could actually, we would, we could potentially invoice each of those entities or entity, each of those businesses for premiums, if they were going to contribute, all of them, were going to contribute premiums toward these policies. Or we could invoice the Holdings Company and add all of those franchises on as additional insurance on those policies. But both are very doable. It just kind of depends on how, how we work with the client to make sure it's structured, you know, based on how, you know, they're going to take and issue premiums from each of those companies or not.
Mike Stohler
Okay, now, as far as the fee structure, I'm sure it's a transparent fee structure. What type of administrator type fees? Are we looking at? The you know, the ongoing the setup and all that sort of stuff? But is there? Is it just like an administrative maintenance type of a fee?
Clay Ogden
Yeah, yeah, absolutely. That's. So under the 831. B, most of the time, these programs cost 30 to 80 grand a setup, like 30 to 80 grand a year to maintain them. And then capital requirements due to the domicile and fees for returns and filings and all that stuff. And it honestly becomes very cost prohibitive for that small to mid market business owner to entertain the idea of using this. And so we built our program to fit that exact model. And so it's $5,000 to form the range, the 31 B year one each calendar year thereafter, it's a $6,000 annual maintenance fee, and either the tax returns, the annual filings, any claims handling loans, dividends, all part of the annual maintenance fee. Okay, perfect. Good. Yeah, the the industry as a whole oftentimes calls it a seeding fee. We call it a retain liability fee. And so when a client puts new premiums in we we retain a percentage of those dollars going in as our fee. And then we also share in the risk when claims take place.
Mike Stohler
What kind of if you could real quickly, what kind of risk are involved in the transaction? Is there any foreseeable, you know, hey, I'm going to do this, I might need it. And then something happened, you know, what kind of risks are involved in the actual transaction?
Clay Ogden
There will be so you do have to file what's called a an 8086 filing, it's basically a transaction of interest. So the IRS is asking, you know, if you're involved in it or not, those are prepared for the shareholders of the reinsurance company, they're prepared for the business that's take, you know, that's contributing premium, they're also prepared for the 31. B itself. We will prepare all of those. Honestly, we view that as a not a bad thing, because we're very transparent in what we do and how our program works. And we're okay with, you know, disclosing how we're doing it and why we're doing
Mike Stohler
it. Do you have to have like a third party administrator in doing the 31 B's? I can't do it on my own. I can't just set up something. Do you have to have the third party?
Clay Ogden
Yes, you need to use using a 31 be administrator. So
Mike Stohler
yeah, that's what I was thinking. Because when you're kind of touched on the fact that we can't touch it. And I want to make sure that we get
Clay Ogden
the funds can't be used for anything other than claims purposes in that first 12 months. But they can be either put in, you know, like a bank account held in cash or they can be liquid investments. So things like stocks, bonds, mutual funds, ETFs, anything that's liquid double within two to three business days to pay a potential claim.
Mike Stohler
Do you have any stories in the last three years? I'm sure you've had some people in the stories where you've saved a business? You know, you've you've really helped them out in the last couple of years.
Clay Ogden
Oh, yeah. Now we've got countless examples of business interruption. You know, people in the dental industry that were closed down for six to 14 weeks, they were deemed non essential. We had a client that was in the medical profession, he performed a pretty niche procedure, had a medical issue and was dealing with chemo and radiation was going to be out for a minimum of 20 weeks. And had you know, that's that's just a massive interruption to the business, that's going to be a loss of roughly 75% of their revenues. You know, they filed a claim under their key employee to hire someone to fill the void while this individual was out, dealing with, you know, things that nobody wants to deal with supply chain and eruptions have hit every industry, it seems like whether people have not gotten product or they got it late, and so they were hit with penalties and fees on their contracts because they were unable to perform. You know, in the development world in the homebuilding world, commercial construction costs of everything has gone through the roof. Yeah, I mean, there's there's endless stories of businesses being able to file claims to pull funds out of their 831 B to now make up for that that dip and cashflow that they've had. So,
Mike Stohler
yeah, well, we should learned about this a couple of years ago, you know, when some of some of the hotels were down to 8%, occupancy, 10% occupancy, you know what, but luckily, we're in states, we're allowed to stay open.
Clay Ogden
Yeah, you know,
Mike Stohler
so it helped us but I can't imagine people in some of the states were there, guess what, you have to close down? Oh, and guess what, you still your mortgage. It's just just absolutely horrible. But you know, it's, it sounds like just a wonderful thing that I don't think any of us has ever heard of. And again, everybody, it's 831 b.com. And, you know, if you have a small business or mid sized businesses, and thank you for doing that, you know, instead of just the fortune five, hundreds, a lot of a lot of companies say hey, there's not enough money in the small and mid tier businesses. But I do think that we're the lifeblood of the American economy. And, you know, everybody, this 831 B, it will help us weather the storm. So if you're interested, please give clay a call. It's 831 b.com. How else can people find you?
Clay Ogden
Our I think our website is probably the best option, you can contact our team on there, you contact myself, our website is an excellent resource for information about our program information about the 3031 B in general, our team is extremely knowledgeable about how these programs work, and how they should be structured. And, you know, at the end of the day, we're here to, we're here to help the business owners that, you know, maybe haven't heard of this, or have looked at this, and maybe it was too expensive. Our average clients somewhere around a million gross revenue to 75 million gross revenue, it's a pretty big spread. But you know, we have a lot of 10 2015 $5 million business owners in our in our program. So
Mike Stohler
yeah, and you know, I think a lot of us can relate to you know, that COVID-19 was just very hard lesson. A lot of us tried to get business interruption claims were denied. Because they're, you know, they considered indirect losses and all the language, everybody, this is just a great way because look, as Clay was saying, don't wait until it happens. Get this plan, it's 831 b.com Get this plan to address COVID 2.0 Or 3.0. Or if you're in the hurricane area. It's like any insurance you know, it's like having your alarm system home. You don't wait till after you're broken into you do it as as something that'll help you in the future. So Clay, I appreciate you coming out. You can probably find clay on LinkedIn and against 831 beat.com Clay, thank you so much for coming on the podcast.
Thanks for tuning in to the richer geek podcast, where we're helping others find creative ways to build wealth and financial freedom. For today's show notes, including all the links and resources from our show, and more information about our guests, visit us at At www.therichergeek.com/podcast. And don't forget to jump over to Apple podcasts, Google Play Stitcher, or wherever you get your podcasts and hit the subscribe button. Share with others who can benefit from listening and leave a rating and review to get the podcast in front of your eyes. I appreciate you. Thanks for listening
ABOUT CLAY OGDEN
Clay could easily be described as the ace of the SRA Team. In his role as National Business Development Manager, Clay does it all as he interacts with business owners and advisors to identify risk management strategies. As a former professional Golfer on the Nationwide, Web. com, Canadian and mini-tours, Clay nurtures many of his business relationships on the course and brings more than 12 years in risk mitigation to identify opportunities and consult with clients and representatives