Split Dollar Insurance Plan
What Is It?
Split-Dollar Insurance is not an insurance policy; it is a method of paying for insurance coverage. A split-dollar plan is an arrangement between two parties that involves “splitting” the premium payments, cash values, ownership of the policy, and death benefits. These arrangements are subject to Split Dollar Final Regulations that apply for purposes of federal income, employment and gift taxes. The final regulations provide that the tax treatment of split-dollar life insurance arrangements will be determined under one of two sets of rules, depending on who owns the policy.
Loan Regime Split-Dollar:
The Loan Regime applies when the employee owns the policy and the employer pays the premiyms. The final regulations had a negative effect on the advantages of this owner/payer arrangement and, therefore, this type of Split-Dollar arrangement is not as popular as it once was.
Economic Benefit Regime Split-Dollar
The Economic Benefit Regime applies when the employer owns the policy but a portion of the death proceeds are endorsed to the employee’s beneficiary. The employee pays the “economic benefit” cost associated with the amount of death benefit coverage endorsed to the beneficiary by having such cost included in his or her taxable income annually. In some cases the employer will provide the employee with a tax gross-up bonus to cover the income tax thus providing a net zero cost to the employee.
This type of Split-Dollar arrangement is many times used in conjunction with a nonqualified executive benefit plan and a cash value life insurance policy. The cash value in the policy finances the benefit under the nonqualified executive benefit plan and the death benefit in excess of the nonqualified plan benefit is endorsed to the employee’s beneficiary. The policy performs double duty in the case.
- Employer can use Split-Dollar as an attractive benefit to attract and reward employees
- The economic benefit regime split dollar can be terminated by the Employer at any time but generally terminates upon the earlier of the employee’s death or termination of service
- Employer can select who benefits under the arragement
- Employee recieves an inexpensive death benefit
- Death benefit is income tax free to the Employee’s beneficiary if structured and administered properly
- If the endorsement to the participant’s beneficiary is terminated when the participant terminates service (other than by death), the Employer becomes the beneficiary of the coverage
- Cost to the Employer may be higher than the economic benefit cost to the employee if the insured is a smoker or is rated
- Unless Guarenteed Issue coverage is available, the Employee has to qualify for the insurance coverage
- The endorsement to a participant’s beneficiary generally terminates when the Employee terminates resulting in no portability of coverage
- Loan regime split dollar is complicated, requires careful Employer planning and administration, and relies heavily on arbitrage between policy crediting rates and loan interest rates