212: Tax Deferral and Risk Management for your Company
Michele 00:00
Hello, my name is Michele, and you're listening to Profit is a Choice. It's not often that I get to dive into a topic that is totally foreign to me when I start the podcast. Usually I've at least heard something about the topic or I have a little bit of knowledge. The 831 B plan was a new thing for me. And Ed Bryan joins me to help us understand this tax deferral and risk management opportunity. Ed is the Director of Business Development at the SRA 831. B Company. He has more than 20 years of sales and operations management experience. And he partners with his clients to provide next level strategies to business owners. If this intrigued you keep listening to learn more. Every day, empowered entrepreneurs are taking ownership of their company financial health, and enjoying the rewards of reduced stress and more creativity. With my background, as a financial software developer, owner of multiple businesses in the interior design, industry, educator and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is a Choice. Hi, Ed, welcome to the podcast.
Ed Bryan 01:23
Hi, thanks for having me on.
Michele 01:25
It's my pleasure, I have to tell you, it is a rare day that I have someone reach out to me to be on the podcast, where they're speaking about a topic that I know nothing about. And that actually intrigued me and made me very excited to have a conversation about something where I am a complete newbie, to the concept. And so I'm going to ask you to talk as if I know nothing, because I don't I mean, I looked up enough to see if it was something that I would be interested in, since I knew nothing. But it is truly a new program and a new idea for me. And so thanks so much for reaching out and saying, Hey, I'd like to talk about this topic.
Ed Bryan 02:09
Sure. No, we're excited about it. You're right, though there's, there's a lot of people that have never heard of this. And it's a shame. But, you know, we'll talk about maybe why people haven't heard about it. And then also, you know, you know, the history behind it, and you know, some of the applications. So I'm excited for the opportunity to talk with you.
Michele 02:26
Awesome. So before we jump in, tell us a little bit about your background, if you would, and what brought you to the point of working with the company that you currently are sure.
Ed Bryan 02:37
So, you know, I did the corporate America thing, like a lot of people did for a long time, I was in business development, I was in operations, those types of things that, you know, a big, big fortune 500 company, and I started to see some of the challenges that corporate America brings to people and you know, didn't want to continue in that rat race. And so I started to look elsewhere. And I really wanted to work with small to midsize business owners. You know, it sounds cliche, but truly those are the people , entrepreneurs that are risk takers. And, you know, I fancy myself as someone like that. And so I thought, you know, I want to work in that industry and work with those people, I enjoy the energy that they bring to what they do every day and their commitment. And so I started to look around and I was kind of recruited into this position, someone that I knew said, Hey, you might be a good fit to go talk about this. And to your point, when they brought it up to me, I said, I've never heard of this before. Right, I need to learn more. And so learn more, did some due diligence. And it's been you know, about six years in the business development phase with SRA 831B admin, that's who we are, and love it, love every day of it. I don't consider it a job. Because you know, like, if you love what you do, it's not a job.
Michele 03:45
So tell us a little bit then we've been talking kind of around it, let's just get right. But what is an 831 B plan? And let's start with the history, but like what it is and the history and how it came to be?
Ed Bryan 03:58
Sure. So let's draw a little bit of a correlation. If you don't mind, I'd hazard a guess that you probably are familiar with the 401k Check. Right? Right. So you've heard of a 401 K, I'd imagine most of your listeners have heard of the 401k. Well, 401k is simply a piece of the tax code. The 401k was put into the into the tax code in the late 70s 1978, to be exact, right? And what it did is it allowed business owners to set aside money on a tax advantaged basis for retirement for themselves and their employees. Right. And so that went into place in the 70s. And it was one of those things early on. It was only a big business tactic. Fortune 500 companies used it to defer compensation, because tax rates at the highest level were astronomical, right? So that's a piece of the tax code. So everyone knows what 401 K is 831 B is simply a piece of the tax code as well. It was put into place in 1986 by Ronald Reagan at that time not to bore your listeners too much. But what was happening was small to midsize businesses were having a difficult time finding insurances that they needed to be able to operate their business As his insurance carriers were raising deductibles that were adding exclusions to insurance policies. And so what happened is, Congress said, Hey, there's got to be an incentive for us to help businesses set aside money for the risks that they have that they can't get insurance for. And so in 1986, they passed this in the law that said small to midsize businesses can own their own 831 B planner. And at that point, they will call the insurance companies and at the end of the day, the IRS still looks at them like that. But we draw the correlation between the 401k and 831. B, because here's what it does for you. It allows you to set aside money as a business owner on a tax deferred basis for risks that fall outside of your traditional insurance. So what does that mean, right? We all know that as a business owner, you've got to have general liability. If you have employees, you have workers comp, you have property, you have umbrella, maybe Commercial Auto, if you run a fleet of delivery vehicles, right. What this does is this covers those other risks, those those be risks that the business owners have, think of it this way, anything that threatens the cashflow of the business, those are the types of risks that you're going to insure through an 831 B plan on a tax deferred basis. So as you pay premiums into this thing, there are tax deductions for your business. So if you own an engineering firm, or an interior design firm, and you pay premiums into this, well, you're able to expense them off of the books on the front end out of your business, and it goes into this 831 B plan. And the 831 B plan does not pick those premiums up as taxable dollars, right. So there's a tax advantage. And then you have coverage, or you have premiums in place to cover you for risk that maybe your traditional insurance doesn't cover you for things like supply chain interruption, right, I'd imagine that in the space that you're listening to. Right, they're dealing with supply chain interruption, and it's stretched across the globe, right. business interruption is another one dispute resolution. You know, let's say that, you know, you own a business, you do a great job on a project. But for whatever reason, the client is not satisfied. And let's say unfortunately, they bring legal action against you. Because as we all know, if you own a business, especially a small business, statistically, you're probably going to be sued at least once every seven years. It sad but true, right. But once again, you can't get insurance on the open market for that. But what if you could take tax advantage dollars and set it aside for that day, right, when you're having good years, you're making good money, take a little bit off the top, put it into this 831 B plan. And then when that day comes, you have that war chest of tax deferred money to go handle the legal expenses. If you have to settle with a client, you have that money and it doesn't have to come out of current cash flow. That's what a 31 B does. Now, here's why you haven't heard about it. And most of your listeners haven't heard about it. Just like the 401 K, big business got a hold of 831B back in the mid 80s. All the fortune 500 companies had been doing this for decades. And so it was very expensive to do. And so there were some very high financial barriers to entry, 831 B, but very similar to the path of the 401 K followed, as you know, almost anyone can have a 401k now and costs come down substantially. Same thing is happening with 831B, we're seeing especially since the pandemic since 2020, exponential growth in the 831B space, especially in that small to mid size business market. And what I would say there is that if you've got clients that are grossing somewhere around, you know where your listeners are grossing right around a million dollars and up, they should at least understand what an 831B plan is, and what it could potentially do for them. It's not a fit for everyone, right? But the truth of the matter is, as a business owner, as an entrepreneur, especially in the small business segment, we find that a lot of business owners just they don't even know what they don't know. Right, they haven't been exposed, they haven't been educated on all of the different tools that they can use to leverage and protect their business and protect their success. That's why I say million dollars in revenue and up every year, you should probably at least understand what it is. And you know if it's a fit great. If it's not, at least you know what it is, if that makes sense.
Michele 08:58
Yeah, that's perfect. Okay, so a couple of different advantages here, just right out of the gate. One is the the tax deferment of the premiums, you know, or, or being able to write them off as expenses. They're it's tax deductible. So then the money that you are saving to protect your business later is not taxed as income and you're able to write that off. Okay. So that's kind of like the double sided thing. I know a lot of times we even talk about building in contingency in my program, but the the clients that I'm working with, build in that I'm a profit for a certified coach. And so we're talking about build these funds up so that if something happens, but the challenge with that is, even if you're building up, you know, lots of money, you don't want it just sitting in a checking account somewhere it's not making money, I'm assuming that these can be invested by 401 k's are so that you can make money on the investment of those premium dollars that you're putting in. Is that a right assumption or wrong assumption? You are correct. Yes, you're not just taking him under your mattress somewhere, right? Oh, no,
Ed Bryan 10:02
no. And, you know, our philosophy is We hope your money makes money, right? Money should make money. That's right to your point, you know. So what we say is, is, this is just an efficient way to save money with risk mitigation attached to it. But to your point, you know, some of our clients, you know, they'll they'll take that money, and they'll park it in a money market account. But I will tell you, the vast majority of our clients will take that money and direct it to investments, right. So while while you have policies in place, so the litmus test here on an 831 B plan is really to think about what a traditional insurance company would do and how they would act and how they would treat their reserves and their surplus. So an insurance company, when they bring premiums in, it doesn't just sit in the bank, right? It goes to work in the market. So while you've got policies in place, and think of it this way, policies with us are a year long, just like traditional insurance policies, right? The funds can be invested right to have to be fairly liquid, fairly conservative, but stocks, bonds, mutual funds, ETFs, those types of investments. But yes, you're absolutely right, we hope that our clients would go out and invest those funds. And then just like a traditional insurance company, with your 831 V plan, once your policy expires, where those premiums are yours, right, as the business owner, you own that 831 B plant. At that point, you have three different options. And this is where the fun part comes in. Right? This is aware that long term planning, were kind of those next level benefits come into an 831 B plan, you can leave the funds there and allow them to continue to grow, you know, you can manage them, leave them within that in inside that a 31 b or the other two options are you can declare a dividend. And you can pull funds out that the qualified dividend tax rate is an individual shareholder rather than ordinary income. So sometimes there's a nice tax arbitrage there. Or you can loan yourself the money, you can loan yourself the bulk of the funds, and then you can take that money as an operating line or you can take that money to go buy a competitor, or whatever the case may be. But here's the here's the real power of an 831 B, as the business owner, you get to choose when you access those funds, right once policies expire, if you don't have any claims in that year. At that point, like I said, you can leave it there dividend against a loan against it. But you as the business owner, year after year get to choose when you do those things. And so a lot of the the CPAs that we talk to right to consult business owners, especially small sized business owners, and midsize business owners will tell you, this is a tax deferral program as much as anything, right, you're able to then instead of to your point, making money and then saving after tax money, there's really no incentive for businesses to save money because they're gonna be taxed on that. That's right. Well, with a program like an 831 B plan, you get to say, hey, no, no, we're going to take this off the front, right, we're gonna expense it out and put it into this 831 B plan, it's not going to be taxed there at the end of the year, then I get to choose, do I want to dividend against it? Do I want to loan against it, too, I want to leave it there and allow it to continue to grow. But as the business owner, you've kind of flipped that that power dynamic, if you will, with with the IRS and said, Now, I can choose when I want to pay taxes on those funds, I'm going to choose how I'm going to leverage that pre tax money in my business or in my personal life, a lot of options there.
Michele 12:57
So let me ask you this, the premiums that are paid in are those the premiums for the management of the program? Or are those truly here a few $1,000 or 10s of 1000s? dollars, please hold this out? And, you know, I guess what I'm trying to get? Because one of the differences that I am thinking, but I'm not sure yet is that like when I pay all of my insurance, right, and I'm paying for multiple companies, and so I know how expensive it is, right? But you're paying in X 1000s of dollars a year, you don't ever get that money back. So at the end of the year, they're like thank you very much for those few 1000. I'm so thankful that you didn't get sued or didn't need insurance or, you know, something didn't happen. And so that's our money now, and you get paid to do it again next year. So, you know, it's a continuous talk through that, though, how was that different than the premiums that we're paying in to this plan?
Ed Bryan 13:54
Exactly. So that's, that's the benefit of this or the power of this, right? Is that when you pay premiums in, so you get a two to one ratio on your dollars, right? So for every dollar that comes in, you get $2 in coverage, right. And I will tell you, you know, most clients that look at this are probably paying somewhere around, I would say $75,000 and up a year in premiums into their 831B plan. If that gives you an idea. Our internal control and compliance mechanism says no more than about 10 to 12% of gross revenue can go into an 831B plan. So yeah, file that away. And then the tax code itself says no more than $2.4 million on an annual basis can go into an 831 B plan. So you have some control mechanisms here. Right. But to that point, let's say that you put in $100,000 in premium, well, you'd have $200,000 in coverage, right? So there is an element of insurance, right? And what we're going to do is we're going to break that up over a handful of coverages that apply in most of your business, and supply chain dispute, brand protection, things like that, right, we're gonna we're gonna break those up. And so you're gonna have an additional layer of risk mitigation over and above your trade National Insurance, but you hit it right on the head, here's the key at the end of the year, right minus any claims that you have all of those surplus reserves, everything that's left over is yours as the business owner, you own that 831B plan, you own the insurance company, in essence, right? Those premiums don't go to anyone else, we definitely charge a fee, right? We charge a small fee when premiums come in somewhere between 10% and all the way down to 3%, depending on the volume of premium, right. But the benefit is at the end of the year, let's say that you haven't had any plans. Well, that $100,000 is yours, right? It's in your 831B plan. And as a business owner, once again, you can choose to loan dividend, leave it there, allow it to grow, and then you would pay new premiums again the next year. So you see what I'm saying. It's like traditional insurance. But what you're doing is you're building good underwriting years, in essence. And so what you're doing is you're building up this money, we always say with the 831B plans, they're not worth anything when we set them up, right? There's no funds, and there are no assets and there initially, but after two or three or four or five years, these things have the potential to be worth millions of dollars, right? If things go right, and things usually do go right with 831B plans, because the types of things that we insure through these are low frequency, but they can be high severity, meaning often than not, right, they're probably not going to happen. But if it does,
Michele 16:16
if they do there, they can be catastrophic. Alright, so I'm going to because I'm the math girl, so I need to, I want to think through this a minute and make sure I understand it. So let's go back to your example, for a minute Ed, where you said, we're going to make $100,000 investment, right? So that would be what we would pay in that first year, perhaps we would have $200,000 worth of coverage. And the company that is managing this, they would get three to 10% of our investment. So let's say they're somewhere between what three and $10,000. Right?
Ed Bryan 16:51
Yes, let's say, let's say 10,000. Just do 10.
Michele 16:54
And keep it easy. Okay, so $10,000, because I'm assuming the 3% is if you're putting in a heck of a lot, like up to the millions, right? Because that's usually the way it works. Yep. Okay, so then it's $10,000, to manage. So that immediately says that the balance in that account, like quick is $90,000. Because we've got the 100, we put in minus the 10, that we're paying for management fees, we still have a coverage of 200,000. But that 90,000 is now being invested. So even if it earned another 10%, it could have us right back at $100,000. At the end of the year, right. So whatever it earned back 8% 10% 12%, just like it would in any other market space, we would be back to $100,000. And then at the end of the year, we can decide kind of like a 529 plan almost is what is keeps coming to my mind. Because with insurance, it would be that give, it's more like give me your $10,000. And okay, you didn't need it. Let's start again, right, the other piece isn't there. But with the 529 plan, it's almost like you're putting money into it, you're paying a fee for them to manage it for a college savings, you're getting tax, you know, incentives to do that, at the end of it, I get to make a decision. Like there were times when we put our boys through college, that we didn't even choose to take money out of the 529 We chose because the market was killing it, to leave the money in there pay out of what we had in our bank account and let it keep growing because it was better. And then at the end, let's say there was money leftover, which there was from Kid A, we just reverted the funds to kid B and now we've reverted him to grandchildren one day, right, I kept the 529 open and just keep saving in it. So this kind of feels like I know that you probably didn't come in. But it feels a little bit like a hybrid to me. So I write but the way that one is managed and the other. So alright, so then your two, we have 100,000 sitting in there. Do we not have any other coverage on that 100,000. Now it's more like it's in a savings plan, if you will. And so now for us to have coverage, year two, we need to put in, let's say another $100,000. So then that immediately takes us up to 200,000. Now our coverage that year, is it 200,000 or 400,000? Because 200,000 is sitting in that account? Good question. It's 200,000 on the current year's premium, and then you have $100,000 Sitting there that you could pull in if you needed. So you'd have 300 You don't get the two to one, right. So we're covered for 300. But we're being invested in and covered for two. So always double the premium of the current year plus whatever reserves.
Ed Bryan 19:37
I get that right, right.
Michele 19:39
Awesome. Okay, that's just the way my brain works to make sure I understand the numbers. I know I've probably we've probably lost a couple of listeners at this point. But you will write the math down for your fingers do Okay, so then that makes sense. So then over time, I see what you're saying, as we're continuing to put money in so really in any given year. So About how much coverage we think we need for that year, and then I'm going to say, plus whatever reserves we have. And so did you ever see, because I could also see two things one? Well, I see it's a great tax advantage, I can also see the opportunity for further yours, you may only want to put 50,000 or 100,000, because you've built up so much back Absolutely, um, reserves from all the prior years, that you also don't want to have $3 million hanging out over there, if you could use them for something else. And so when you do take that money out, right, are you then taxed on it at the current rate that you would be taxed on at that point? I know, you mentioned some of the taxation pieces a minute ago?
Ed Bryan 20:46
Oh, that's a great question. So let's talk about that. And the scenario that you just kind of talked through is exactly what a lot of business owners use this for, right? They, they want to build that thing up. And but they might get to a point where they say, Hey, I have a half a million dollars, or I have a million dollars in here, I'm not going to fund at the same rate, right? Because I know I've got that rainy day fund, but to your point, so when they take funds out, you can you can withdraw funds, two ways, I alluded to the loan, right, so loans do not create taxable events. So that's a popular strategy. So a lot of our clients will take a loan, and you can take loans from a shorter say, a 60 day bridge loan, all the way to a 15 to 20 year mortgage, and then you would be paying your own 831 B plan back, right. There's no additional fee to do that. And we use the AFR rate, which is, you know, the lowest rate that you could charge and have something be considered a performing note, but you'd be paying your own 831B plan back. Now, if you actually would want to withdraw funds and come out as a qualified dividend.
Michele 21:36
Alright, let's talk for one second before you go further. So that that then goes back to being very similar to the way that you can borrow from your own 401k and pay back into your own 401k. As well as if you take a withdrawal, sometimes there penalties and then you also are paying taxes on what you withdrew. Is it similar in this case is exactly okay.
Ed Bryan 21:55
So now, the nice thing is, if you decide to take a dividend, as long as funds have been in there for at least a year, you can declare basically a dividend, right? It would come out at the qualified dividend tax rate, effectively long term capital gains as an individual. So for your business owners, especially successful business owners, their ordinary income tax rates are up there right there. 35, 37. Plus you add state depending on where you're at. Some of these business owners can be mid 40s, even as high. Right? Yep. And so what happens is, long term capital gains tax is usually somewhere between 15 and 20. Right? So if you can say simply, hey, well, instead of paying 50 cents on the dollar on income tax, I'm going to pay 15 to 20. Well, you know you've won there as well, there's a very nice tax arbitrage. So those are the two ways to access funds down the road, out of your out of your a 831B plan.
Michele 22:44
Now is a couple of other really, maybe a little more techie questions. Is it transferable? If you were to sell the business?
Ed Bryan 22:51
Good question, you can do that. At the same time, you have the option, that's, that's the beauty of this thing, right is you're in control, you can say, hey, I'm going to leave this with the business, or I'm going to take it with me, right? A lot of business owners will look at this and say, This is almost like a quasi retirement fund for me, meaning I'm going to put money in here. And then if I sell the business or, or, you know, maybe my child takes it over, or I sell it to a big conglomerate, well, then I'm going to take my 831B plan and all of the assets in there, and I'm going to take that and kind of ride off into the sunset. Right and at the same time, so what we've seen there sometimes is, if the business is used to the 831 B plant, a lot of times the business owner will take theirs with them when they sell the business or exit the business. And then the business, the new owners will set up a new 831 B plan.
Michele 23:32
Okay, okay. And so then they can pretty much just close it out, even use the money. Let me ask this, is there any advantage to the 831? B, let's say that owner does sell the company, is there an advantage to roll it into a 401 K or an IRA or something like that, to reduce taxes into you know what I mean? Is there a way that it can now be converted? Like when you leave one place? And you we can 401 K's can be converted all the time? And is there a way to do that here?
Ed Bryan 24:01
Great question. Yeah, well, yeah, so what I will say is this. So we're in a 831B administrator, right? So we we see a lot of really creative things. We don't necessarily consult on that. That's where we bring in the financial advisor, the business consultant and the CPA, right. You've always got to bring the CPA, right. But I will tell you, yes, there are a myriad of ways to roll these things, tax advantaged vehicles, okay.
Michele 24:21
That's what I'm not necessarily for you to sit here and give me details. And, of course, I am taking notes, however, but just wanted to, you know, kind of have an idea of how it could be used, because I can also see some listeners going, okay, so I did this for 10 years, I've got a million dollars sitting there and all of a sudden, have a million dollar income in one year and even at 15, 20% on top of everything that I'm earning from the sale of a company, this is a lot and I'm getting ready to get some absolutely, and you know, so I can appreciate that. So I would think that they would want to be some way that maybe you didn't have to take it if the company's gone right and it's there, that you're not having to take it all at once, so that's an inch.
Ed Bryan 25:01
And you're exactly right now what I'll tell you, and that kind of leads me into an interesting risk that we put into 831B is we do something called a transactional risk packet. So if you're a business owner, and you're selling your business, right, and you know this, as a business owner, a lot of times you're making guarantees, you're making representations and warranties in that buy sell agreement, well, you're a lot of times on the hook personally, right? For those types of things, right. And it might be for a year to be as many as three to five years, what we say is, let's set aside some of that money in a transactional risk policy, basically, with inside your 831B, let's defer some of the profits of the sale of the business. And let's set that money aside for a year to three to five, however long that that obligation is you can continuous on that 831 B. And then if one of those incidents pops up 18 months later, you once again have tax deferred dollars to go address that issue, if you have to go to court or if you have to pay, you know, some kind of a penalty. So once again, there are other ways even to leverage this on the way out as you're exiting your business.
Michele 26:02
Now, when the funds are used for a risk that we are trying to insure against, are those taxable then to be used? They're just taxable as a long term game question. Here's what I'll say. Because that's different than saying, let me take a loan and go buy a house. That's different than saying, let me take a disbursement or just a withdrawal to go enjoy my life. This is I'm actually using it for what I set it aside to use it for, how are those funds treated when there
Ed Bryan 26:31
depends on the type of loss, right and the type of risk that you have. So if it is to replace income, what I would always say, and what we always encourage our clients to do is consult with your individual CPA that does your business taxes. If it's to replace income, I would say strongly, we would look at that as income, right? You know, if you're if you're bringing money back into replace income, it's probably going to be taxed at corporate tax rates. Now, if it is to recover from a loss, or to replace damaged equipment, or whatever the case may be, or an expense that you had, that's a topic of conversation for your CPAs. I know some CPAs say it isn't taxable. Others will say that it is once again, that's where we say let's consult with your CPA that does your taxes within your business, we want to all be on the same page. There's a myriad of opinions EBIT, especially income wise, if you're pulling money into replace lost income, I would suspect that's going to be taxed as income. If it's to recover from a loss, that's a little bit more of a gray area.
Michele 27:22
Okay, so let me ask this, then, because I think that would be important to know, to determine how much you're trying to put into this, whether you're really trying to use it for just long term savings in some ways, or if you're really using it to mitigate risk. Because if you're going to be taxed on that later, then you you really need to consider saving more than you need, so that you can pay the taxes on it. It's not a one for one, when it comes back out is I guess what I'm trying to say.
Ed Bryan 27:52
So what you get back, so if we won't dive too much into what we call the principles of insurance, but just to kind of talk about how this works, right? Because this is you kind of hit the nail on the head here, we do something where it remember I said you get $2 for every dollar that you put in? Well, the way that we achieve that is we do something called risk sharing, we create risk Co Op. So all of our 831B plans share risk with each other, right, a pro rata share, it's fractional, but what that means is let's say that you want to make 831B plan and I own one. And let's say that I have a claim, well, a tiny little fraction of a percent of my claim will be paid by every other 831B plan that has that policy in a given year, the financial risk is very low, we take a lot of steps to mitigate that. But you have to have what's called Risk distribution or risk sharing, right. So what that means is, let's say that you had a claim, and it came back to you out of that money that comes back to you about 50 to 60% is going to be your own money, the remaining somewhere between 40 and 50% is going to be money that's pulled from other 831B plan. So you are going to receive money back that you didn't necessarily put in if that makes sense. So a lot of times I can see where you're going. And a lot of times, what you'll see is some business owners will say I'm not sure I want to make a claim because I don't want to pay taxes on that. And then you sit down and talk with them and say, Okay, you set the money aside for risk mitigation. We need to use this for this incident, because this is exactly the type of incident that that occur. And what happens is they start to look at the math and realize even after paying taxes on that I'm still coming out ahead. Right. And that's the way the program is designed right now.
Michele 29:26
Are their deductible payments when you have to take a hit against it just like with any other injury.
Ed Bryan 29:32
Yes, yes. So we do have we have, on average somewhere between 10 and through and 7% deductibles on 10% is probably the most common but what we do is we'll net that out of a claim. So because the thing is this, let's say that you have a client or one of your owners, they are one of your business owners has a an interior design firm, writer practice and they have a claim. Well, what we do that is the insured that company itself is the insured we will net the deductible out so they don't have to pay that. So if they had let's say 100,000 claim, what we're really going to do is we're going to send them $90,000. We're going to net the 10,000 out if that makes sense.
Michele 30:05
Yep. Okay, exactly. Yep. Wow. Okay. Can you give us some ideas at the types of things that would make people say, or that would spark an interest in this program? That may be and I know you mentioned supply disruption and that kind of thing. But what are some? Oh my gosh, I don't think what I have for either a business owners policy liability, all the coverage, the umbrella is, you know, the multiple millions I have. It's not enough. I need more. So let's talk about it from truly that insurance perspective, as opposed to the money strategy to save tax deferred. I think we understand that a little more what would those really look like? Or what are some other reasons?
Ed Bryan 30:51
Yeah, great question. So what I, there's a there's a couple things, let's approach it through a couple of different avenues. The first thing I would say is, as a business owner, you know, maybe holistically step back and say, How has the last three years gone? Right? Where where, you know, what kind of risks have I faced that? And maybe was I impacted in a way where I thought I had insurance? And I didn't, right, because we've seen that happen a lot over the last three years, unfortunately, especially with business interruption, right, people thought that they had traditional business interruption insurance, and their carrier said, Well, wait, you didn't have a flood or a fire and earthquake, you know, you were deemed non essential your office was shut down due to the COVID 19 pandemic, you can file a claim, right? So so those types of things. And then the other things are, you know, cybersecurity, a lot of business owners, they're sure there's cybersecurity insurance out there. But a lot of times it's riddled with exemptions. And there are limits, and they're just big gaps in those policies. And as you know, in this interconnected global economy of this virtual online world we live in, right, there's just more and more risk for business owners, especially small to midsize business owners. And so, you know, we've seen a significant upswing in the last three to five years in business owners looking for real cybersecurity insurance that covers things like phishing, social engineering, and those types of things. And we're seeing a lot of pressure there, because unfortunately, people that are attacking, especially those, those hackers and cybersecurity criminals, they know that small to midsize business doesn't necessarily have the awareness in the cybersecurity that a fortune 500 company does. And so they're easy targets, right. And so a lot of times, we'll see them mocking up invoices or hacking into bank accounts, and just all kinds of really bad things that add the business owner goes to their insurance policy, and they find out well, you're not covered for this. So you opened a personal email on a work computer, and sorry, that exempts this policy writer, it doesn't trigger it. So those are big things, the dispute resolution, I hit on, you know, unfortunately, people love to sue business owners, they think they have deep pockets. And you can't really get insurance for that. So that's a big one. You know, key employee critical illness is another big one. Right? You know, and the question on that always is what, you know, what does that cover? Well, what it means is, let's say that you own a business, and I work for you, right? And let's say that your competitor across town comes in and says, Hey, you know, I'm going to pay you four times as much and I leave. Well, that's not necessarily an insurable event, because I left it that's ordinary business risk, right? That's the risk that your business owners take every day the entrepreneur takes. However, let's say I work for you and I get sick, right? And I'm out for three months, and I'm a critical employee in your business and your revenue drops, and you have to go hire a temp, those are insurable risks. Those are the types of things that right now you're not covered for as a business owner. Right? You know, and that's what I would just say to business owners is, take a hard look at your traditional insurance. Because no doubt, traditional insurance does a great job covering tangible assets. where traditional insurance doesn't do a great job is in these emerging types of risks, or those little gaps in between policies that can be catastrophic to business owners, right? They think they have coverage, and they don't write or they think that this covers something and then it finds out well, this didn't happen, right. And the joke is always this, if you look at insurance policies are getting thicker and thicker. It's not because insurance companies are adding more coverages, especially for small to midsize business owners. They're adding more exemptions and more exclusions to those policies.
Michele 34:11
So if somebody is listening, and they're thinking, this sounds like something I'd like more information about, certainly, and we'll give all of the information to contact you and your team. But is this also something that you would then work with the business owner? And like you mentioned earlier, maybe their financial advisor, their CPA, their attorney, some other you know, people that know really about that business? My assumption is that you're a company your team comes in as part of that plan to protect and care for that business and a longer term and so it's not a let me run out here and go do this without talking to the other professionals who are knee deep and helping manage the business.
Ed Bryan 34:54
Absolutely. I can't stress that enough. I'm glad you brought that up. As we work with with business owners other trusted Pfizer's, we want to make sure we're on the same page with everyone we understand what the company does the nuances of the business, understand the business owners concerns, maybe the risks that the business owner has that maybe they haven't told anybody about, right? We always say it's the things that you're laying in bed at night as a business owner staring at the ceiling at 2am, saying, you know, how do I handle this, or what if this happens to my business, and that only comes through a collaborative approach where we work with their trusted advisors, and we become another piece to that puzzle, if you will, that's what we always say is if your other advisors on aren't on board, a lot of times this won't work. And so we always want to make sure that everybody understands how this works, how the assets are treated, how the how the tax consequences play out for the business owner, because at that point, if we're all on the same page, it'll only insure further that the business owner is going to win across the board.
Michele 35:47
Right. And, you know, even in my coaching and consulting practice, I feel the same way. Like I work with my clients, I'm talking to their accountants with them, I'm talking to their bookkeepers, their financial analysts like we're working together, because everybody has a piece of the puzzle. And sometimes the business owner might not see a piece, or sometimes, if they don't see something, and they're not sharing with you, one of those other advisors may see it. And it adds nuance that needs to be addressed and the entire, you know, creation of this. And that can imagine to that it is different for every person, because we're all maybe have different tax statuses, we're in different states, there are different rules, even though this is I'm assuming federal, there are still different rules and regulations on how we're taxed, where we live, and what's happening. And, you know, if there's more than one person being taxed, I know, I hear that a lot, where the women may say, oh, my gosh, my tax rate is so high, because my husband, you know, we're adding our incomes together, and vice versa, the husbands will say, Oh, my gosh, look what my wife's done. And now so, you know, where maybe they used to be in a different tax bracket, there's a combo of the two that changes the dynamic of where they are and what their the tax implications are. And so this would need to be thought about in regards to also the whole family, I would think at some point.
Ed Bryan 37:04
Absolutely. And then, you know, I'm glad you brought that up, because that's exactly the point, right? There are a lot of moving parts here. And, and we always look at an 831 V plan is it's just an additional layer, right, or it's a part of a bigger plan. But to your point, there are some there are some short term, and then there are long term consequences, right when you're starting to look at these assets. And so you're absolutely right, it has to be collaborative, we have to all be on the same page and communicate and make sure that we have the full picture. Because at the end of the day, we really want this to be a benefit for the business owner. But it'll only we'll only maximize that benefit if we have all of the information that we need. And we're all together on the same page working forward for that business owner.
Michele 37:41
I think one other thing that everybody just if they're listening needs to take into account is, if we're going to make these payments, that means we've got to be cashflow positive in a way to actually make the payment is calm, like I can remember early on in my business, my accountant would say to me, okay, Michele was when I have like a SEP IRA, right, instead of a 401 K IRA, Michele, you can put X amount of dollars in there. And I'm like, That sounds amazing. That means I gotta have that money available to put in there that hasn't been allocated somewhere else. And so when you're saying that maybe the average or you know, a getting get in fee that most people are paying of 75 to $100,000, that money's got to show up on our books. prior to it being expensed out as net profit, like it's got to be at the bottom of the p&l. But we can then pull out move up to an expense line and still be able to run the company without cash, strapping it. And so we just need to be really careful to understand this is something that you plan for this is something that you build towards, you don't just show up usually, and say, Oh, I've got a couple extra hundreds of 1000s of dollars, I gotta find something to do. And now great if that's where you are. But for many companies that might be moving forward, they have to make the plan for this, what is the lowest amount that you've seen somebody start with, like if somebody was listening today, and they're just approaching a million dollars, because we also know a million dollars in revenue is not necessarily a million dollars in gross profit and 9.9 times out of 10 is not. And so therefore, by the time we reduce expenses, we could easily if we do our 6040 and interior design, we could be a million dollar business 600,000 cogs $400,000 gross profit, and then we've got to take the money out to run the company. And if we took out 50% of that we you know, to run a company like that, which is kind of an average, we're going to be down to about what $200,000 net profit and part of that is also our pay, right? If we're at an S corp, or a
Ed Bryan 39:38
C Corp. Exactly. I will tell you this, we've seen people come in right around 50,000. That's probably know and I guess I would say this, it's gonna vary greatly based on the state that you're in. If you're in California or you're in New York or you're in Hawaii, a really high tax state, that it'll bring that number down to where it makes sense, you know, versus if you're in say, Nevada or Texas somewhere where there's no state tax, right, then that number might creep up a little bit, it might be higher, it might be closer to 100 might be over 100. Right. So and what I would say it's a case by case basis, and we sit down and we do a pro forma and make sure hey, this is what it would look like if you did the program at certain dollar amounts. And we're very thorough in that due diligence phase.
Michele 40:16
Okay, awesome. Awesome. Well, this has been very enlightening. I, I dig on this, I think it's pretty interesting. Is there anything else that you want to share with our listeners that maybe I haven't asked or that we haven't covered that you think they need to know before they start blowing up your phone and ask them?
Ed Bryan 40:36
You know, I, you know, I think I can't stress enough. And because I truly believe in it. You know, I think you owe it to yourself, as an entrepreneur, as a six successful business owner, someone that's building their business, educate yourself on all of these different things that are out there, whether they're 831B plans, look at the 401Ks look at just all of the different options that are available to you as a business owner, because a lot of times what you'll find is that these tools that are enterprise level that the big titans of industry are using are available to you in just a little different flavor. Right. But if you do some digging, and your podcast is a piece of this, listen to podcast, do some research, read, ask questions, right? If you do that, you're going to be surprised a lot of times that there are tools that are out there that it's almost the the best kept secret that nobody talks about, but it could be changed life changing for you, and it could change or transform your business and become a long term planning strategy that you didn't even know existed a year ago. So that's really, that's what it is. And that's why I say we're educators, first and foremost, you know, like you said, 831B, you know, what people are saying, What the heck is that? I never heard of it. Well, that's why we want to get the word out. Because truthfully, we believe that 831B is going to become just like the 401k, where everyone knows what it is. Now, whether that takes 10 years, or 15 or 20. You know, that remains to be seen. But the truth of the matter is, is I think for small to mid sized business owners out of necessity, they owe it to themselves to look at these types of programs.
Michele 41:58
We're always kind of asking ourselves the question, with maybe this not being something as widely used for small businesses, does it raise a flag to the IRS?
Ed Bryan 42:10
Good question. And you know, so here's what I would say, anytime there's a tax incentive attached to something, the IRS is going to look at it more closely. That's why you why you would employ us as your third party administrator as your 831B plan administrator, we have an established track record of doing these things in the right way we do the tax returns, we make sure you're staying compliant, no different than if you offered a 401 K, you have a 401 K administrator to make sure that the business is doing what it's supposed to. So what I would say is this, we don't believe that this increases your risk, but it has to be done. Right. Right. Like anything, there are right ways and wrong ways. And if you if you're doing it for the wrong reasons, here's what I would say, if you're only doing it for the tax benefit that I would say you might want to question if it's really worth your time. But if you truly, as a business owner, look at this and see the value in both the risk mitigation and the tax benefit. And I think that's something that you should pursue. But like I said, that's why you work with us, we offer a guarantee to all of our clients, that if the IRS has to ever challenge your 831 B plan, we'll provide the legal team and go fight that fight on your behalf. And in 12 years and over 600 of these things that we formed in manage, we've never once had a client have to use that.
Michele 43:15
Okay, awesome. I just know, that's a question that we're getting at, because we've also put other things out there of how not to raise the flag. And right now and it sounds like that we might be getting a few 100,000 Extra IRS folks hired up so we just want to make sure we're not we want him to go work with somebody else and not. Except for maybe giving us a refund, they can work with that where you give it that? Well. And thank you so much. Tell everybody where they can find you. Where where's your company hanging out online?
Ed Bryan 43:45
Yeah, sure. It's, you know, it's actually really simple. We're just 831B.com 831B.com you can go there, or you can reach out to me via email, my email simple, it's just ed@831B.com. Or you can give us a phone call to the office here. 208-424-2249. I'd love to talk to you. And like I said, if it's something that, you know, I guess I'll add one final thing, timing is big on these things, you kind of hit on it, right? You have to have the cash, right, you have to have the disposable revenue in your business. But what a lot of business owners will do when they look at this, they say hey, I'm on my way up, things are good. I'm growing a business, I'm building a business, and we'll talk to them. And a lot of times the the determination is not right now, or hey, let's wait till next year, right? Or let's wait till you get here. I just know we look at ourselves as really a partner, right, a long term advisor when it comes to something like this. We're not salespeople, you know, we're educators first and foremost, and timing is critical. And so know that if this is something you're just even interested about, give me a call. We'll take 15 to 20 minutes and we'll talk through your own individual situation. And it might be let's wait, right. I mean, I had somebody called me the other day i La. I talked to him in 2017. If that tells you anything that was the last time I talked to him. They called me about a month ago and said hey, we're ready to go sit perfect. Right. Now we're ready to go. That's the way we approach this. We want you to look at us There's a long term consultant in this space and have the competence that we have your best interest as a business owner and entrepreneur at heart.
Michele 45:06
That's amazing. Well, thank you so much. I'll make sure I put all your contact information in the show notes. And I have been enlightened. And I love it because I learned something completely new today. So thank you for that.
Ed Bryan 45:16
Thanks so much. It was great.
Michele 45:19
Yeah, thanks for sharing with us today about the 831 B plan, how it works, why we might need it and how it's administered. Always thinking about the later and not just the now in our business is a great strategy. Our businesses are different and as such may experience differing risks. Please talk to your trusted advisors and consider bringing in Ed and his team to see if this is a fit for your company. A large part of our mission here at Scarlet Thread Consulting is to help business owners learn to create a strategic plan and manage to it if this is of interest to you or a need for you. Please apply for a discovery call at scarlet thread consulting.com And if you want to manage your money better to cover your risk, check out MetriqueSolutions.com. Either way, take control of your money and the risks associated with your company. Each of these leads you towards profitability, and we know that profit doesn't happen by accident. Profit is a Choice is proud to be part of the designnetwork.org where you can discover more design media reaching creative listeners. Thanks for listening, and stay creative and business minded.