How to Tell If Your 831(b) Plan Is IRS-Compliant

831(b) captive insurance plans offer legitimate benefits when structured correctly. But the IRS has identified abusive arrangements — those designed primarily for tax avoidance rather than genuine risk management — and has pursued them aggressively. Knowing what compliance looks like is not optional. It is the foundation of any captive strategy worth having.

Why the IRS Pays Close Attention

In 2016, the IRS added micro-captive transactions to its list of "transactions of interest," requiring disclosure on federal tax returns. Since then, courts have ruled against numerous captive arrangements that lacked economic substance — specifically those where premiums were not tied to real risk.

The IRS focus has been on captives where the primary purpose was tax reduction rather than genuine insurance. Business owners in this space need to understand the line clearly.

Markers of a Compliant 831(b) Plan

•       The arrangement covers real, identifiable business risks — not hypothetical or contrived scenarios.

•       Premiums are set by an independent actuary and are commensurate with the risk being insured.

•       The captive operates like a real insurance company: properly capitalized, with issued policies and a functioning claims process.

•       There is genuine risk distribution across multiple insureds or through reinsurance arrangements.

•       Documentation is thorough: policies, claims procedures, underwriting analysis, and board minutes.

•       Qualified professionals — tax counsel, actuaries, and captive managers — are involved from the start.

Red Flags That Signal Problems

•       Premiums are set primarily to maximize deductions rather than reflect actual risk.

•       The captive never pays claims, or claims are processed as a formality.

•       The arrangement was marketed primarily as a tax strategy.

•       Risk distribution relies on arrangements with no genuine economic substance.

•       Documentation is thin, inconsistent, or retroactively created.

•       The promoter discourages independent legal or tax review.

What to Do If You Are Unsure

If you currently have an 831(b) arrangement and are uncertain about its compliance, the first step is an independent review by qualified tax counsel — not the firm that sold you the arrangement.

Early identification of issues creates more options for remediation than waiting for an IRS examination.

How True North Private Investments Helps

At True North Private Investments, we approach 831(b) strategies with compliance as the foundation, not an afterthought. We work alongside tax and legal professionals to evaluate whether a captive is appropriate for your business and whether existing arrangements meet current IRS standards.

Final Thoughts

A compliant 831(b) plan is a legitimate and valuable tool. An improperly structured one is a significant liability. The difference comes down to who designed it, how it was built, and whether it reflects real insurance economics.

If you have questions about your current captive arrangement or want to evaluate a new one, schedule a conversation with True North Private Investments.