Chapter 3 Review

Although they may appear complex, split dollar plans are generally simple to administer and easy for employers and employees to understand.  The fundamental concept is simple and straightforward: a party with financial resources-typically an employer-assists the party with the life insurance need-typically an employee-to purchase life insurance.  

Under the traditional split dollar plan, a life insurance policy covering an employee is owned by the employer.  The employer pays a premium equal to the increase in the policy's cash value each year, and the insured employee pays the balance of the premium.  Since life insurance policies normally have little or no cash value in the first couple of years, the employee covered under the policy in a traditional split dollar plan must pay almost all of the early policy premiums.  This is a drawback in traditional split dollar plans, which is remedied in certain split dollar variations.

Prospects for split dollar plans include public corporations, closely held corporations and unincorporated businesses.  In these organizations, executives routinely use split dollar plans to provide life insurance benefits to meet both personal and business needs.  

Life insurance policies issued in split dollar plans may be owned by the employer or by the insured employee.  If owned by the employer, the right to name a beneficiary for the death benefit is endorsed to the employee; hence, the name endorsement split dollar is given to this arrangement.  If the life insurance policy is owned by the employee, the policy is assigned to the employer to secure its interest in the policy.  This type of split dollar plan is known as a collateral assignment plan.

As a result of recent IRS rules with respect to split dollar taxation, the tax treatment given to split dollar plans depends on whether the policy is owned by the employer or the employee.  If the policy is owned by the employer, the employee is taxed on the imputed value of the death benefit.  

If the policy is owned by the employee and repayment of the employer's premium payments is envisioned, the employer's advances are considered loans on which the employee must pay interest.  If the employee fails to pay interest on the employer's premium advances or pays at a rate below the applicable federal rate, the IRS will impute additional compensation to the employee and a simultaneous interest payment to the employer.   

If the policy is owned by the employee and repayment of the employer's premium payments is not envisioned, the employer's advances are considered additional compensation to the employee.


Chapter 3  Review Questions


What portion of the annual premium in a traditional split dollar plan is paid by the employer?

A.     The entire premium
B.     The portion of the premium that is equal to the policy’s cash value increase
C.     One-half the annual premium
D.     The portion of the premium equal to the reportable economic benefit



Who or what owns the life insurance policy in a traditional split dollar plan?

A.     The insured
B.     A trust
C.     The employer
D.     The beneficiary


What is the most frequent use of split dollar plans to meet business needs?

A.     Funding a deferred compensation plan
B.     To provide death benefits in qualified plans
C.     To provide key person coverage
D.     To fund buy-sell agreements




What is the principal determinant of the tax treatment given split dollar plans?

A.     The type of split dollar plan
B.     The size of the death benefit
C.     The ownership of the policy
D.     The age of the insured



If an employee owns the life insurance policy in the split dollar plan and is not required to repay the employer’s premium payments, the premium payments are:

A.     below market loans
B.     additional compensation
C.     a gift
D.     a bequest