831(b) plans: Placing power back into the hands of the insured

Today’s insurance market is under enormous strain, especially for small businesses. Premiums continue to climb, coverages are shrinking, and many states are seeing carriers leave the marketplace altogether.

Although this crisis is painful, it is also one that feels extremely familiar. Once again, an American financial system is undergoing a crisis, and small businesses are left with two options: find a solution or close their doors forever. In the face of adversity, American small businesses are beginning to once again do what they have done in the past – leverage existing tax policies to place power back into their own hands.

Back in the 1980s, America was faced with a retirement and long-term financing crisis when traditional pensions began to falter. As a response to an impending crisis, Congress worked to pass and introduce Section 401(k) to the Internal Revenue Code. This then-revolutionary tax policy was not quickly accepted, but following years of proper implementation and education, it is now one of the most widely accepted methods to provide workers with a tax-advantaged way to prepare for retirement.

The birth of health savings accounts

Once again, in the early 2000s, America was faced with another crisis – this time in the health care industry. Costs were out of control, and Americans were faced with fronting the bill of the rising costs to insure. Recognizing the severity of the crisis, lawmakers worked to alleviate the pressure and solve the problem by encouraging consumer-driven health care. To stimulate the market, prevent a crisis and shake up a system that had been in place for generations, they ultimately crafted health savings accounts. These plans serve as tax-advantaged savings accounts that individuals can use to pay for qualified medical expenses.

HSAs were different from 401(k)s however, due to their duality of use. HSAs offer the user a triple tax advantage due to their federally tax-deductible nature, which reduced the taxable income of everyday Americans. HSAs also allow individuals with high-deductible health plans to gain more control over their health care spending and encourage them to shop around for services. By taking the pressure of the then-overloaded health insurance market, these plans successfully circumvented a potentially cataclysmic insurance crisis.

However, despite their obvious benefits, neither 401(k) nor HSA plans were widely adopted at their inception. It took time for the public to learn, understand and appreciate these tools for what they are – industry-changing advancements in the way we operate. In fact, following their widespread adoption, these programs drastically changed American systems for the better. They alleviated the pressure in the insurance and retirement industries, funded competition in additional markets, and provided greater access and opportunities for small businesses and employees alike.

A new solution: 831(b) plans

Today’s small businesses are facing a new crisis in the mainstream insurance market. The rising cost of insurance, decreasing coverage and increasing uninsured damages are ravaging America’s small businesses. As they have before, many small-business owners are leveraging an existing underused tax policy to circumvent and get ahead of the crisis – this time the solution is in line 831(b) of the Internal Revenue Code.

Originally added nearly 40 years ago, this tax policy creates a self-insurance vehicle for small businesses to mitigate risks that impact their unique operations. Similar to 401(k)s and HSAs, 831(b) plans place power back into the hands of the insured and allow pre-tax dollars to be set aside for a rainy day – providing flexibility in coverage and the security in knowing your policy is here to stay. Like the early days of every tax policy plan, 831(b)s have not been implemented in the mainstream business operations – but they are on the rise and will change the way small businesses insure themselves forever.

With thousands of small businesses experiencing difficulties accessing adequate and affordable coverage options, 831(b) plans have the ability to take off some of this pressure, opening up the market to greater competition and empowering small businesses to take their risk management into their own hands. It’s obvious something in our system needs to change, and if we’ve learned anything from changes we’ve seen in the past, it’s that there is always a new solution.

As we advance into the future and continue to combat this insurance crisis, we have few better options than 831(b) plans. With broader awareness and adoption, they could play the same transformative role for small business insurance that HSAs played in health care.

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