The COVID-19 pandemic has highlighted the fragility of the business landscape in ways no one could have anticipated. With most people confined to their homes and dealing with social distancing rules, businesses had to adopt new ways to make money or risk closing their doors. One of our clients owned a dental clinic in a university town that depended on students coming through its doors. When the university switched to online classes and most students went home, that income disappeared. However, this business had an advisor who understood risk mitigation efforts and encouraged them to use an 831(b) plan, thus allowing the clinic to keep its doors open and pay its employees while they waited out the storm.

An 831(b) plan allows businesses to set aside tax-deferred dollars for uninsured risks, resulting in companies creating their own form of self-insurance. Most often, these are used for new risks that companies cannot plan ahead of time. These are things that are not covered by traditional insurance.

In fact, traditional insurance only covers what companies refer to as pure risks, which are types of risks that are beyond human control. These risks may or may not result in some form of loss; however, the possibility of financial gain is nil. These risks, also known as event risks, can include fire or death. They cannot be predicted beyond a person's control.

However, emerging risks are categorized separately, leaving business owners open to huge losses. Some may refer to this as a “loophole” in a policyholder's insurance coverage, allowing insurance companies to deny the insured business or individual coverage for unexpected losses.

Often there is three categories for emerging risks, advisors should know about:

• A new risk in a known context: These are risks that appear in the external environment and affect the existing activities of the organization.
• A known risk in a new context: In the scenario of an already known but evolved risk, the management of the risk in question may need to change.
• A new risk in a new context: These are risks that have not been considered before, as they are new to the organization.

As market volatility becomes a growing issue, investment advice and financial advisors will be sought after. Many clients will come in looking for risk mitigation strategies or need help with crises already occurring with their portfolio. We have identified some of the most common emerging risks that many of our customers have faced:

• Supply chain disruption
• Credit risk
• Loss of agriculture/livestock
• Political risk
• Natural disasters and adverse weather
• Cyber ​​security issues/breaches

One way financial advisors can help clients avoid these emerging risks is to understand what is typically not covered by traditional insurance. By learning these uninsured risks, advisors can better focus on building long-term plans for success. As the term suggests, an emerging risk is not something that financial advisors and their clients can see before it happens. However, both parties can take steps to mitigate these damages even before they occur.

One solution that is growing in popularity is an 831(b) plan, which allows a business to self-insure through tax-free funds specifically designed to protect against uninsured risks. These policies are broadly written and allow for coverage through self-insurance, thus allowing businesses to get back on their feet in the event of the unexpected.

Although an 831(b) plan is a robust and viable vehicle for self-insured risk and has been proven through recent events such as COVID-19 and the strengthening of the P&C insurance market, we have seen The IRS scrutinizes 831(b) plans in general without providing any guidance on compliance. In fact, Congress created this tax code nearly four decades ago, during the 1980's debt crisis, as the insurance market stiffened — much like we're seeing today. The spirit of tax code 831(b) is to allow small and medium-sized businesses to self-insure against risks that may not be covered by traditional insurance—something that's more important than ever in today's fast-moving economy.

In today's unpredictable business environment, it is essential that advisors stay ahead of new risks that traditional insurance may overlook. Understanding these risks and implementing strategies such as the 831(b) plan can provide a vital safety net for businesses.

Dustin Carlson is the President of SRA 831(b) Adminan 831(b) plan administrator.