IRC 7872-15 Collateral Assignment Split Dollar (CASD)
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. 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. 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 interest to avoid income inclusion. The organization is repaid the amount of the split-dollar funding (which may include interest) from the death benefits of the policy and the employee may access the cash value during his or her retirement years, or a specified access date. These arrangements have been used for decades as a way for organizations to retain and reward key executives.
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 interest 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, any accrued interest. Secondly, the policy or policies should also be designed to build enough cash value that the executive can access during his or her retirement years, or an access date.
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 Sections 7872-15 and 61-22 of the Internal Revenue Code (the “Code”) govern these arrangements.
Organization Perspective
The organization records the split-dollar loan as an “other asset.” The interest on the split-dollar loan will be accrued and reported as “other income.” The balance of the split-dollar loan (principal and accrued interest) will be adjusted, no less than annually.
Key Considerations
Retention Value
Timing and Amount of Capital Requirements
Impact on Financial Statements
Flexibility
Plan Administration Requirements
Regulatory Environment
Taxation
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 or withdrawals to basis.
Footnotes
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.
Defined as the appropriate applicable federal rate (AFR) in effect on the funding date.
