Split Dollar Benefits
Split dollar plans hold benefits for both the employer and the insured executive. They can help employees provide for their survivors' welfare, and can help an employer develop a group of loyal key executives. Both of these objectives can be accomplished at virtually no long-term cost to the employer. Other split dollar advantages are detailed below.
The value of a split dollar plan for a specific employer depends on its needs and objectives. Some of the generally more important employer benefits are:
The executive becomes more closely involved with the employer
The plan helps to impart a feeling of executive value
The plan is simple to administer and involves no long-term employer cost
Plan control in a traditional split dollar plan resides in the employer's control, and
The policy's cash value becomes an employer asset
Since the employer's contributions to the split dollar plan depend on the executive's remaining with the corporation, the plan can cause the key executive to more closely identify with the employer. In addition, a key executive that is considering a change of employers may see the loss of an in-force split dollar plan as sufficient to cause him or her to remain in the current situation.
Since the split dollar plan is nonqualified and informal, it enables the employer to be selective with respect to participation. As we noted in Chapter One, this selectivity allows the employer to reward the key executive alone and enhances the executive's sense of importance to the employer.
A split dollar plan can be established with minimal paperwork and need not be submitted to regulatory authorities. Understandably, this simplicity appeals to many business owners.
The owner of the policy in a traditional split dollar plan is the employer; as the policyowner, the employer also owns the cash value. The employer, therefore, has a readily available reserve fund for business uses. In the likely event that the insured employee survives until retirement, the employer may provide a special retirement plan for the employee using the policy's values.
There is no long-term cost of a split dollar plan to the employer other than some possible opportunity cost since the employer always recovers its premiums. That recovery comes from the cash value in the case of surrender or from the death benefits if the insured were to die while the plan is in force. And, since the employer retains control over the split dollar plan, it may terminate it when and for whatever reason it chooses.
The insured executive under the life insurance policy in the split dollar plan also enjoys certain benefits. Principal among them is that the executive uses corporate funds to meet his or her personal life insurance needs in a low-cost and flexible way. Executive split dollar benefits include:
Low cost life insurance coverage
Protection against becoming uninsurable
Coverage that may continue beyond the executive's retirement
Use of corporate funds, and
By using a split dollar plan, the executive receives low cost life insurance protection. In a traditional split dollar plan the executive must report the economic benefit received as income and pay tax on it. Despite that additional tax, however, the executive purchases life insurance in a split dollar plan more inexpensively than under any other method.
A split-dollar plan also acts as a hedge against the executive becoming uninsurable in the future. If the executive should subsequently become uninsurable, he or she will be insured to an extent greater than otherwise might have been possible because of the plan.
Unlike typical group or other employer-sponsored life insurance plans, the split dollar plan may enable the executive to keep the coverage in force after retirement by reimbursing the employer for its premium payments. This termination of the split dollar plan with the resulting sole ownership by the executive is called a rollout. By taking a rollout, the executive can acquire a permanent life insurance policy whose premiums are based on the insured's age at the time the policy was issued, instead of at the executive's age at the time of purchase from the employer.
The split dollar plan enables the insured executive to use corporate funds rather than personal funds to meet his or her life insurance needs. Split dollar plans offer significant flexibility in plan design. We will examine the major variations on the traditional split dollar approach later in this Chapter.