Participant Funded Split Dollar
IRC 61-22: Under Endorsement Split Dollar, the employer owns the life insurance policy. The employer “endorses” to the executive the right to name the beneficiaries of all or a part of the death benefit – typically being the total death benefit minus the greater of the cash value or cumulative premiums paid. The executive pays income tax annually based on this share of the death benefit, which is known as the economic benefit cost. Typically, a “roll-out” or transfer of policy ownership takes places once an executive reaches a certain access date. Once this transfer occurs, the executive is taxed on the greater of the cumulative premiums or cash value as w2 income, which is subject to IRC Section 4960, which imposes a 21% excise tax for any compensation paid above $1M
Endorsement split dollar plans are designed to provide valuable key person death benefits to a business and personal death benefit protection to a key employee's family. A life insurance policy is purchased, and the premium payments and policy benefits are divided between two parties—usually a business and an employee.
How It Works
In a corporate split dollar plan, sometimes called an economic benefit regime, a business provides the benefits of a life insurance policy to a key employee by splitting the value of the policy between the employee and the company.
Under this arrangement, the business owns the policy, pays the premium, and retains all rights to the cash values for the length of the employee’s agreed-upon tenure. The business endorses a portion of the policy’s death benefit to the employee to ensure that his or her beneficiaries receive financial support in the event of his or her death. However, the business retains control over the policy and its cash values. The key employee pays taxes on the value of the life insurance protection, called the reportable economic benefit charge (REBC), each year.
Applicable
Businesses that implement a split-dollar life insurance arrangement must comply with Section 101(j) of the Internal Revenue Code (IRC), which applies specifically to corporate-owned life insurance policies. The Code sets specific recordkeeping and reporting requirements and sets limits on the amount of premiums that can be paid by the business.
Organization Perspective
The employer pays the premiums for their life insurance
They have flexibility in the plan design to meet their individual needs
They may receive tax-free income through partial withdrawals and loans
Opportunity for tax-deferred growth of cash values
Key Considerations
Retention Value
Timing and Amount of Capital Requirements
Impact on Financial Statements
Flexibility
Plan Administration Requirements
Regulatory Environment
Taxation
Executive Perspective
You select who receives benefits, when they receive them and how much they receive
Fewer limits or rules than traditional qualified plans
Low start-up and administrative costs
The chance to recoup your business’ investment when a valued employee quits, retires or dies
