PRINT -- Chapter 3
Split Dollar Plans

The important points addressed in this lesson are:

Split dollar plans are generally easy to understand and simple to administer

Split dollar plans always involve at least 2 parties: the insured with the life insurance need and the party willing to assist the insured in buying the coverage-usually an employer

The traditional split dollar approach, calling for the employer to pay premiums equal to the policy's cash value increase, has certain drawbacks that may make other split dollar approaches more attractive

Split dollar plans offer important benefits to both an employer and the employee

The major markets for split dollar plans include corporations, non-corporate business organizations and family situations

The major variations on traditional split dollar, including level outlay, employer pay all and employee pay REB, were designed to meet specific situations and overcome traditional split dollar concerns

The employer, the insured employee or a third party may own a life insurance policy issued in a split dollar plan-or the ownership may be split

Split dollar plans may be used by the insured to meet business or personal insurance needs

The decline in the personal beneficiary's death benefit due to the employer's increasing interest may be overcome by using the 5th dividend option or through an increasing term insurance rider

In endorsement split dollar plans, the policy is owned by the employer who endorses the right to name a beneficiary to the employee

In collateral assignment split dollar, the policy is owned by the employee who assigns it as collateral to secure the employer's premium payments

Split dollar rollout refers to the termination of the split dollar plan and transfer of the policy to the employee

Split dollar tax treatment depends on who owns the policy; if owned by the employer, the employee must include the reportable economic benefit in income; if owned by the employee, the employer's premiums are deemed to be either loans or additional compensation




Characteristics of Split Dollar Plans

Split dollar plans for the purchase of life insurance are arrangements involving at least two parties in which a permanent life insurance policy is purchased.  The policy's premium and death benefits are split between the insured with the life insurance need and the party that is making the funds available to purchase the policy.  Although split dollar plans may be arranged between any two parties, the most common arrangement is the one between the insured employee and his or her employer.

Typically, in a split dollar plan, the following occur:

Policy premiums are split between the insured and the party with the resources.
Policy death benefits are split between the insured's personal beneficiary and the party paying the bulk of the premiums.
Cash values may be split between the two parties to the plan.


Traditional Split Dollar Approach

We noted in our general discussion of nonqualified plans that one of their strengths was their ability to change shape to meet the objectives of the employer and the plan participant.  This characteristic is true for split dollar plans as well.  As a result of this flexibility, there are many ways to split a life insurance policy in a split dollar plan.  We will begin our split dollar plan discussion with an examination of a traditional split dollar plan.

In a traditional split dollar plan, the part of the policy premium paid by the employer is equal to the increase in policy cash value each year. At some point, the cash value increase will normally exceed the policy's annual premium.  When that occurs, the entire annual premium is paid by the employer.  The portion of the policy's annual premium that is not paid by the employer is paid by the insured executive.  

Typically, in a whole life insurance policy, the premium increase in the early years is quite small, and, in the first year, it is usually zero.  What that means, of course, is that the insured is required to pay the entire first year premium since the employer's portion of the premium is limited to the increase in cash value.  For this reason, split dollar plans that employ a traditional split dollar approach usually use life insurance policies that have high early cash value increases.  (Other split dollar approaches-and there are many-do not require high early cash value increases to moderate the insured's early premium payment levels.)

In a traditional split dollar plan, the employer owns the life insurance policy and endorses to the insured the right to name a beneficiary.  As a result of this endorsement of rights, this type of split dollar plan has come to be known as the endorsement method.  The insured's personal beneficiary receives any death benefits that are in excess of the employer's interest in the policy.  In the case of a traditional split dollar plan, that interest is an amount equal to the policy's cash value.

In split dollar plans, the employer's interest continues to grow as it makes additional premium payments.  As a result of that growing employer interest in the policy, its share of the policy's death benefits increases.  To the extent that the employer's share of death benefits increases, the personal beneficiary's share decreases.  
Even though the decrease in the death benefit share received by the personal beneficiary may not be particularly large, the decline may not be consistent with the personal beneficiary's need for life insurance protection. In such cases, the personal beneficiary's death benefit can be kept at the level of the original face amount (assuming the policy is a participating whole life insurance policy) by using the fifth dividend option.

By selecting the fifth dividend option, an amount of one-year term life insurance equal to the policy's cash value is purchased each year by application of the dividend.  Any dividend declared in excess of the amount required to purchase the term insurance can be applied under one of the other dividend options.  The employer's portion of the policy death benefit in the traditional split dollar plan is equal to its aggregate premium payments which, in turn, is equal to the cash value.  Since the additional term insurance purchased by the dividend is equal to the employer's portion of the death benefit, the personal death benefit portion generally remains level and is equal to the policy's face amount.

If the policy in the split dollar plan is a non-participating policy, i.e. it is not eligible for dividends, the same result can be obtained by using an increasing term insurance rider.  In an increasing term insurance rider used in connection with a split dollar plan, the rider death benefit is usually equal to the policy's cash value.  An increasing term insurance rider requires an additional premium.  

If a universal life policy instead of a whole life policy is used in the split dollar plan, the personal beneficiary's death benefit may be kept at a level amount by selecting death benefit Option B.  In a universal life insurance policy with this death benefit option, the death benefit is equal to the initial face amount plus the cash value.  Since the death benefit under this option is increased by the policy's cash value (which is payable to the employer), the personal beneficiary's death benefit remains level at the initial specified amount level.  In some universal life insurance policies, a death benefit Option C is available and is particularly appropriate to split dollar plans.  Under an Option C death benefit, the total death benefit equals the initial face amount plus the aggregate premiums paid.  Under Option C as well, the personal beneficiary's portion of the death benefit will tend to remain level.   

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.

Employer Benefits

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.

Executive Benefits

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
Flexibility

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.


Prospects for Split Dollar Plans

A wide range of situations call for the use of split dollar plans.  These plans can be used profitably in public corporations as well as in closely held ones.  Despite that broad applicability, we will focus attention on its applicability to the closely held business since the majority of agents will find entrée to those organizations to be far easier than to public corporations.

Bear in mind the characteristics of closely held businesses as we review the use of split dollar plans.  One of those important characteristics is that usually the business owner and its manager are the same person or persons.  

The Closely-Held C Corporation

A closely held corporation may be a regular corporation or one that elects to be taxed as an unincorporated business, i.e. an S corporation.  Regardless of how it chooses to be taxed, a closely held corporation just refers to one whose stock is not publicly traded.  

Owners of a close corporation might choose regular corporation status because:

Employee benefits for business owners are tax deductible and
The corporate tax bracket may be lower than the stockholders' tax bracket, causing corporate funds to be more tax-efficient than personal funds

The fact of different income tax brackets for the corporation and its owners may play a big part in the selection of a split dollar plan.  When a corporation is in a lower income tax bracket than its owners, the corporation pays less in income taxes to net $1 of after-tax income than its owners.  

As a result of that difference in taxation, every personal expense that can be paid with corporate dollars results in a savings, sometimes a very substantial savings.  This is the reduction in costs that causes the split dollar plan to be attractive to owners of regular corporations.  In a sense, the corporate owner is turning a personal expense into a corporate expense and saving taxes in the process.

Using Corporate Funds to Meet Personal Financial Needs

A life insurance policy that is part of a split dollar plan can solve the same personal needs that personally-owned life insurance can, such as providing:  

An income to surviving family members
Additional retirement income, and
Estate liquidity

Even though these are common uses of life insurance in split dollar plans, there are many other uses to which life insurance may be put whether purchased within a split dollar plan or not.  

Life insurance is commonly used to replace a breadwinner's income.  There are many "rules of thumb" that are offered to estimate need, but the preferable method of determining how much life insurance should be purchased is through an analysis of the survivors' income needs.  Following determination of the life insurance need:

The split dollar plan document is created by an attorney
The employer pays the agreed-upon portion of the premium
The application for life insurance is completed, and
Any supplementary documents are drafted
An executive insured under a split dollar plan may create additional retirement income by accessing the policy's cash value after the life insurance in the plan is rolled out to him or her.  (This method may be less attractive because of recent IRS split dollar rulings.)  Alternatively, the life insurance policy in the split dollar plan may be used as an informal funding vehicle to provide a salary continuation plan for the executive when the split dollar plan is terminated.  Under such an arrangement, the employer may keep the policy in force in order to recover its costs to provide the salary continuation plan benefit.       
Providing estate liquidity is often accomplished through the use of life insurance in a split dollar plan.  The plan may use a single-life policy or a survivorship policy.  If the executive wishes to keep the death benefits from being included in his or her federal gross estate, the split dollar plan may be arranged between the employer and a third party-often an irrevocable trust-in a third-party split dollar arrangement.  In such an arrangement, the executive normally makes an annual gift and transfers the gift to the trust.  The trust then pays the portion of the premium that would normally have been paid by the executive.  
At the death of the executive, the personal beneficiary's share of the death benefits is paid to the trust which, then, purchases estate assets or loans funds to the estate to pay estate taxes and other settlement costs.  Upon estate settlement, the trust-held assets are distributed to the trust beneficiaries.  These trust beneficiaries are customarily the executive's heirs.

Of course, split dollar plans can be used to meet certain business needs.


Using Split Dollar Plans to Meet Business Needs

There are many business needs that can be met with life insurance in split dollar plans.  Its most frequent use, however, is in connection with buy-sell agreements.  Two of the most common situations involve funding:

Cross purchase agreements between stockholders or partners, and
One-way buy-sell agreements involving a sole proprietor or sole corporate owner


S Corporation Use of Split Dollar Plans

An S corporation is a domestic corporation that elects to be treated like a partnership for tax purposes.  A corporation electing S corporation status (provided it meets the S corporation requirements) will generally not be subject to tax at the corporate level, and revenues and expenses will flow through to the shareholders.  As a result of that tax treatment, there is no distinction in the S corporation between its tax bracket (since it doesn't have one) and the tax brackets of the shareholders.  For that reason, there is no tax advantage in a split dollar plan for shareholders in S corporations as there is in regular corporations.  There may be other reasons for split dollar plan use in S corporations, however.

Shareholders in S corporations often find split dollar plans appropriate for funding a cross purchase agreement when the shareholders' ages differ.  The reason for split dollar use in such a case is fairly straightforward: it permits the shareholders to share the total premium burden equally.  
We noted just above that the lack of a corporate tax bracket in an S corporation removes the tax motivation from the split dollar plan involving shareholders.  The same issue does not apply to other S corporation employees.  Instead, split dollar plans insuring executives in an S corporation that are not also shareholders enjoy the tax treatment given to C corporations.

Unincorporated Firms' Use of Split Dollar Plans

Split dollar use in proprietorships and partnerships has the same limitations that it has in S corporations.  The lack of difference between the tax brackets of the business and its owner means that there is no split dollar tax advantage.  Just as we found in the case of S corporations, however, there may be other reasons for its use.

Among proprietorships, the primary split dollar application concerns its use by non-owners.  The business that is a proprietorship may have the same executive attraction and retention problems experienced by other businesses. Addressing those issues is the primary use of split dollar in a proprietorship.  

Partnership use of split dollar plans is somewhat broader than it is in a sole proprietorship.  Split dollar plans can help equalize the allocation of premiums in a buy-sell agreement between partners of different ages.  A partnership may also use a split dollar plan to keep a valued executive happy rather than making him or her a partner.


Using a Split Dollar Plan in the Family

Although the bulk of split dollar plans involve an employer and an employee, they are not the only application of split dollar.  Split dollar plans are sometimes used in intra-family situations.  Typical uses of split dollar plans in the family involve:

Ensuring a married child's financial security, and
Equalizing an heir's inheritance



Technical Considerations

A significant issue with respect to split dollar plans-particularly in the current unsettled IRS climate-is their taxation, and we will examine the taxation of split dollar plans in some detail.  Before considering how split dollar plans are taxed, however, we will discuss some of the traditional split dollar concerns and its principal variations.


Traditional Split Dollar Concerns

In a traditional split dollar plan, the employer pays a portion of the premium equal to the annual cash value increase, and the executive pays the balance.  A substantial disadvantage of the traditional split dollar approach is that the executive usually must pay the entire annual premium him- or herself in the first couple of years.

Although some of the premium burden can be lifted from the executive through the use of a life insurance policy with high early cash values, the executive's premium in the early years is still fairly large. This is the crux of the first-year premium problem in traditional split dollar plans.  

An additional concern in traditional split dollar plans has to do with the reportable economic benefit (REB) that may arise.  The REB approximates the value of the current benefit received by the insured.  If the life insurance policy in the plan is owned by the employer, the insured executive must report as income in that year the amount of the REB in excess of his or her share of the premium payment.  

The executive's premium share in the early years of a traditional split dollar plan (remember the share in the first year is usually the entire premium) exceeds the REB.  However, the insured cannot carry that excess forward to offset the REB in later years when the employer may be paying the entire premium and the insured must recognize imputed income.  As a result of these limitations, certain split dollar variations have developed.


Variations on the Traditional Split Dollar Plan

There are four principal variations on traditional split dollar:  

Level outlay
Employer pay all
Employee pay REB, and
Bonused REB.

Let's briefly consider each of these variations.  In each case, we will assume that the policy in the split dollar plan is owned by the employer.  In the actual case, the policy may be owned by either the employer or the executive.  As we will see, later in this section, the tax results will be different depending upon which party owns the policy.


Level Outlay Split Dollar Plans

We know that, in the traditional split dollar plan, the employer pays the portion of the premium equal to the cash value increase.  So, the total employer premium payments at any time are equal to the cash value.  

If, in a traditional split dollar plan, the policy's cash value at the end of 10 years is $20,000, we know that the employer has made premium payments totaling $20,000.  The level outlay split dollar plan simply takes that cash value and divides it by the number of policy years that have elapsed to calculate an average outlay per year.  For example, by dividing the $20,000 cash value at the end of policy year 10 by the 10 years, we can see that the average premium per year paid by the employer was $2,000.  Once the average employer premium per year is determined, that amount is paid by the employer each year, and the insured pays the balance.

This split dollar plan approach helps to overcome the two principal concerns of the traditional split dollar plan: high early premiums and no REB carry forward. Furthermore, the employer's premium can be leveled over 10 years, 20 years or even longer.  The result, in most cases, is that the employer's portion of the premium tends to increase-and the executive's portion tends to decrease-as the duration increases.


Employer-Pay-All Split Dollar Plans

In the employer-pay-all split dollar variation, the employer pays the entire policy premium for as long as the split dollar plan is in force.  The executive makes no premium payments and must include the entire REB in his or her income each year.  

Since the rates that may be used to determine the REB are so low, the executive's total annual tax cost is likely to be lower than the premiums for a comparable amount of one year term insurance.  


Executive Pays REB

When the employer owns the policy and pays the entire premium for it in a split dollar plan, the executive must pay the REB.  The executive may eliminate the imputed income by paying a premium each year that is equal to the REB.  

By doing that, the executive's premium tends to increase each year while the employer's premium tends to decrease.  If the intention is to roll out the policy to the executive at some time in the future, this may be an appropriate plan design since it reduces the employer's interest in the policy.  This reduced employer interest also reduces the amount paid to the employer when it is rolled out or when the death benefit is paid.

Bonused REB Costs

Rather than having the executive pay premiums equal to the REBA each year, a variation calls for the employer to bonus the REB to the executive each year.  The amount bonused becomes the executive's premium payment for the year.  As a result, the imputed REB cost is avoided as is any executive out-of-pocket premium payment, and the executive's cost is reduced to the income tax payable on the bonused REB.  



Policy Ownership

The policy in the split dollar plan may be owned by the employer or by the insured.  Under the most recent IRS rules, the tax treatment of the plan depends on who owns the policy.  In the traditional split dollar plan the employer owns the life insurance policy.  However, the policy may be owned by:


The employer in an endorsement split dollar plan
The insured in a collateral assignment split dollar plan, or
Both the employer and the insured, jointly.

Let's look at each of these approaches.


Endorsement Split Dollar

In the traditional split dollar plan, the policy is owned by the employer who enjoys all of the policyowner rights.  The employer endorses the policy to grant a right to the executive to name a personal beneficiary for any death benefit in excess of the employer's interest.  

The split dollar agreement states:

The premium split between the insured and employer
The death benefit split between the employer and the personal beneficiary
How policy dividends will be applied
Who will own the policy, and
When the split dollar agreement will end

The documents needed in the endorsement split dollar plan, in addition to the insurance application, are:

A board resolution authorizing the plan and the life insurance purchase, and
The split dollar agreement
Endorsement split dollar is typically appropriate when the employer wants to control the policy and its cash values.  It is also indicated when the parties wish to avoid characterization of the employer's premium payments as a loan to the executive.  Clearly, if the intention is to give the executive access to policy cash value, a different approach needs to be employed.

The endorsement split dollar approach is not appropriate in third-party split dollar cases.  In such cases, the concern is one of transfer for value.  In simpler terms, if the employer gives a third party the right to name the beneficiary, a transfer for value may have occurred.  


Collateral Assignment Split Dollar

A collateral assignment split dollar plan generally gives policy ownership to the insured.  Before the change in IRS rules concerning split dollar taxation, collateral assignment was more popular than the endorsement method.  It is not yet clear, however, which regime will subsequently emerge as the most desirable.   

In collateral assignment split dollar, the policy in the split dollar plan is owned by the insured.  In return for its payment of premiums, the insured policyowner assigns the policy to the employer as collateral.  When the insured dies or the plan terminates by rollout or surrender, the employer recovers its premiums.  The insured (or third party) in a collateral assignment split dollar plan owns the cash values in excess of the employer's collateral interest.

The life insurance policy application in the collateral assignment split dollar plan does not reflect the split-dollar nature of the premium or show any assignment of policy ownership.  The cash value and death benefit split is accomplished entirely by the collateral assignment.

The collateral assignment split dollar agreement states:

The premium split between the insured and employer
The death benefit split between the employer and the personal beneficiary
How policy dividends will be applied
Who will own the policy,and
When the split dollar agreement will end

The documents needed to establish a collateral purchase split dollar plan, in addition to the life insurance application, are:

A board resolution authorizing the plan and the life insurance purchase
The split dollar agreement, and
A collateral assignment form

Collateral assignment split dollar has generally had a broader application than endorsement split dollar, including providing:  

Corporate business owner employee benefits
Additional retirement income
Estate liquidity, and
The insurance funding for cross purchase buy-sell agreements.

As noted earlier, it remains unclear how the IRS tax rules with respect to split dollar plans will affect the relative popularity of these plans.

Split Dollar Rollout

The term "split dollar rollout" refers to the termination of the split dollar agreement and the severance of the employer's interest.  The employer's interest in the policy is satisfied, and the insured or third-party becomes the unencumbered policyowner.  

Rollouts of split dollar plans are usually arranged to repay the employer's premium payments and provide for premium offset at the same time.  The net result may be that the insured executive has little or no subsequent premiums to pay.  If the policy is a whole life insurance policy, the bulk of the funds required to repay the employer's premium interest may come from the surrender of paid-up additions; if it is universal life insurance, the funds often come-at least partly-from cash value withdrawals.   Withdrawals are generally taken to basis, and any additionally required funds may be taken as policy loans.  

The executive usually tries to effect the rollout so that no subsequent premium payments are required.  In the case of universal life insurance, the executive normally leaves cash value in the policy sufficient to pay the monthly deductions.  In the case of whole life insurance, dividends may be sufficient to offset subsequent premiums.   Despite the type of policy involved and just how the rollout takes place, the result is identical: the employer recovers its premium payments, the collateral assignment is lifted and the out-of-pocket premiums may cease.     


Split Dollar Taxation

The tax treatment that is given to a split-dollar plan depends upon which party-the employer or the executive-owns the policy.  If the employer owns the life insurance policy, e.g. in an endorsement split-dollar plan, the employee has a reportable economic benefit based on the current value of the term insurance benefit provided and the dividends applied to his or her benefit.

The method by which employee taxation occurs under an employer-owned policy may vary, depending upon the particular situation.  Any of three methods may generally be used to determine the value of the term insurance in an employer-owned life insurance policy:

If the split-dollar plan involves a contractual agreement between the employee and employer requiring the use of P.S. 58 rates and the split dollar plan was entered into before January 28, 2002, P.S. 58 rates may be used.
Rates known as the Table 2001 rates may be used to measure the value of the current economic benefit, or
The lower of the insurer's published one year term premium rates or the Table 2001 rates may be used  

P.S.58 Rates Per $1,000 of One-Year Term Insurance
Attained Age
P.S. 58 Rate
Attained Age
P.S. 58 Rate
Attained Age
P.S. 58 Rate
15
$ 1.27
38
$ 3.87
61
$ 22.53
16
1.38
39
4.14
62
24.50
17
1.48
40
4.42
63
26.63
18
1.52
41
4.73
64
28.98
19
1.56
42
5.07
65
31.51
20
1.61
43
5.44
66
34.28
21
1.67
44
5.85
67
37.31
22
1.73
45
6.30
68
40.59
23
1.79
46
6.78
69
44.17
24
1.86
47
7.32
70
48.06
25
1.93
48
7.89
71
52.29
26
2.02
49
8.53
72
56.89
27
2.11
50
9.22
73
61.89
28
2.20
51
9.97
74
67.33
29
2.31
52
10.79
75
73.23
30
2.43
53
11.69
76
79.63
31
2.57
54
12.67
77
86.57
32
2.70
55
13.74
78
94.09
33
2.86
56
14.91
79
102.23
34
3.02
57
16.18
80
111.04
35
3.21
58
17.56
81
120.57
36
3.41
59
19.08
37
3.63
60
20.73



TABLE 2001 RATES PER $1,000 OF CURRENT INSURANCE PROTECTION
Attained Age
Table
2001 Rate
Attained Age
Table
2001 Rate
Attained Age
Table
2001 Rate
Attained Age
Table
2001 Rate
0
$ 0.70
25
$ 0.71
50
$ 2.30
75
$ 33.05
1
0.41
26
0.73
51
2.52
76
36.33
2
0.27
27
0.76
52
2.81
77
40.17
3
0.19
28
0.80
53
3.20
78
44.33
4
0.13
29
0.83
54
3.65
79
49.23
5
0.13
30
0.87
55
4.15
80
54.56
6
0.14
31
0.90
56
4.68
81
60.51
7
0.15
32
0.93
57
5.20
82
66.74
8
0.16
33
0.96
58
5.66
83
73.07
9
0.16
34
0.98
59
6.06
84
80.35
10
0.16
35
0.99
60
6.51
85
88.76
11
0.19
36
1.01
61
7.11
86
99.16
12
0.24
37
1.04
62
7.96
87
110.40
13
0.28
38
1.06
63
9.08
88
121.85
14
0.33
39
1.07
64
10.41
89
133.40
15
0.38
40
1.10
65
11.90
90
144.30
16
0.52
41
1.13
66
13.51
91
155.80
17
0.57
42
1.20
67
15.20
92
168.75
18
0.59
43
1.29
68
16.92
93
186.44
19
0.61
44
1.40
69
18.70
94
206.70
20
0.62
45
1.53
70
20.62
95
228.35
21
0.62
46
1.67
71
22.72
96
250.01
22
0.64
47
1.83
72
25.07
97
265.09
23
0.66
48
1.98
73
27.57
98
270.11
24
0.68
49
2.13
74
30.18
99
281.05




Split-dollar plans may use an insurer's lower one-year term insurance rates instead of the Table 2001 rates only if the insurer's one-year term insurance rates are available to all standard risks.  Split-dollar plans that are entered into after January 28, 2002 may use an insurer's one-year term insurance rates only if the insurer meets certain conditions:

The insurer must make the availability of those rates known to anyone that applies for term insurance coverage, and
The insurer must regularly sell term insurance at those lower rates to anyone that applies for term insurance coverage through its normal distribution channels.

If the employee owns the life insurance policy instead of the employer, split-dollar taxation is quite different.  In such cases, the IRS makes a distinction between split dollar arrangements under which the employee must repay the employer's premium advances and those not requiring repayment.

The premiums paid by the employer are deemed loans on which the employee must pay interest if the employee is required to repay those premium advances.  In such a case, the employee-policyowner will be deemed to have received a below-market loan if he or she:

pays no interest, or
pays interest at a rate that is less than the applicable federal rate

Applicable federal rate
 The IRS publishes base interest rates each month that are known as the applicable federal rates (AFR). They are used for various purposes under the Code, including being used in imputed interest and original issue discount rules. The AFR is normally available during the third or fourth week of the month.

If the insured under the plan is deemed to have received a below-market loan, any unpaid interest is considered additional compensation and a simultaneous interest payment from the employee to the employer.  As a result, the employee has an additional tax liability equal to the interest that should have been, but was not, paid.  

In the unusual situation wherein the employee owns the life insurance policy and is not required to repay the employer's premium advances, the premium payments are considered additional compensation, subject to income taxation.  Although the insured that owns the policy may have additional compensation or an imputed loan, neither the value of the pure term insurance benefit nor any dividends applied to the insured's benefit result in income tax liability.  

The employee's tax treatment of split dollar plans is summarized in the chart below.

Split Dollar Insured Employee Tax Treatment  Summary
 Taxability to Insured Employee
 Policy Owned By
 Employer  Premium  Payments
Cash  Surrender Value Allocation
Value of Pure Term Life Insurance
Dividends Applied to Insured's Benefit
 Employee and obligation to repay employer premium payments
 Premium payments not taxable, but interest must be charged at least equal to AFR or imputation of taxable income results.
 No
 No
 No
 Employer
 No
 Yes, when split-dollar agreement is terminated and policy is rolled out
 Yes, imputed income based on Table 2001 rates or insurer's one-year term rates (P.S.58 rates in certain cases)
 Yes
 Employee but with no obligation to repay employer premium payments
 Yes, employer's premium payments are taxable as compensation
 No
 No
 No


Summary

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.