Split Dollar Plan

by | Mar 31, 2019 | Blogs

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Summary

Split-Dollar is not a type of insurance but a method for two parties (often organizations and their employees) to purchase and share the benefits of one or more life insurance policies. These arrangements have been used for decades as a way for organizations to retain and reward key executives. There are two (2) “types” of split-dollar arrangements, but for this document, we will assume the “loan regime” (historically referred to as collateral assignment) form. The “loan regime” form of split-dollar, if appropriately designed, is non-compensatory and is used when the organization wants to provide retirement cash flow and death benefits.

 

Life Insurance Policy or Policies > Repayment of Premiums > Premiums > Retirement Cash Flow

How It Works

The organization pays the premiums on one or more life insurance policies. These premiums are treated as loans to the executive for tax purposes only and must be repaid with enough interest1 to avoid income inclusion. There are two competing objectives in a split-dollar arrangement. First, the organization must be repaid the amount of the split-dollar funding and, frequently, accrued interest. Secondly, the policy or policies should also be designed to build cash value that the executive can access during his or her retirement years.

  • The vesting provisions under a split-dollar plan are flexible and can be tailored to the specific needs of the organization;
  • Vesting in a split-dollar arrangement’s benefits results in neither income inclusion for the executive nor excise tax to the organization; and
  • Split-dollar arrangements can either be fully funded at implementation or incrementally over several years. The decision to fund incrementally should be carefully considered as it does introduce interest rate (AFR) variability into the discussion.

Applicable Regulations

The final split-dollar regulations were issued in 2003 and are contained in 26 CFR 1.61-22 and 26 CFR 1.7872-17. We view the status of the split-dollar regulations as stable and are not aware of any pending modifications.

Organization Perspective

The organization record the split-dollar loan as an “other asset.” The interest on the split-dollar loan will be accrued periodically and reported as “other income.” The balance of the split-dollar loan (principal and accrued interest) will be adjusted, no less than annually, to the lesser of the split-dollar loan balance or the cash value of the life insurance policies and other associated assets.

Executive Perspective

Unlike the other executive retirement benefit plan options, the executive does not recognize income upon vesting. The split-dollar regulations provide that, so long as the policies are sufficient to repay the split-dollar loan and any accrued interest when it is due (typically upon the executive’s death), there is no income recognition. Should the policy or policies lapse, an income recognition event could occur.

Subject to vesting and other contract terms, the executive can access policy values through life insurance policy loans. These loans are not includable in income so long as the policy remains in force through the executive’s mortality.

Key Considerations

  • Retention Value
  • Timing and Amount of Capital Requirements
  • Impact on Financial Statements
  • Flexibility
  • Plan Administration Requirements
  • Regulatory Environment
  • Taxation

For more information, contact: (972) 318-1110

Accounting for split-dollar arrangements is based on the substantive agreements, the organization’s facts and circumstances and a review of all available evidence. Organizations should obtain independent guidance on proper accounting for split-dollar arrangements.

Learn more about Types of Life Insurance with TriscendNP.

Footnote:
  1. Defined as the appropriate applicable federal rate (AFR) in effect on the funding date.

For more information, call (972) 318-1110 or contact us.

About the Author: Alex Staron

Ms. Staron joined the company in 2009 and has served in a leadership capacity for several departments over the years. Currently, Ms. Staron oversees a wide range of functions at TriscendNP including Business Development, Client Relations and IT. Contact or learn more about Alex >>
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