The name describes a method of paying for insurance by “splitting” the premiums and proceeds between an employer and an employee.
Economic benefit split-dollar arrangement plans are similar to what was known pre-final regulations as the “endorsement” method. The employer has title ownership of the policy and by beneficiary designation assigns most of the death benefit to the employee’s beneficiaries. The “cost” from a tax perspective is tax paid by the employee on the “economic benefit” of having the net death benefit payable to the personal beneficiary.
Since the policy and all the cash value belong to the employer, there is no “employee equity.” If the employee has any access (whether actual or deemed) to policy cash values, the regulations provide for taxation of those amounts to the employee. It is also possible to structure a plan under this regime with tax consequences as outlined above where the employee or an irrevocable life insurance trust has title ownership to the policy and retains only the death benefit in excess of the greater of the employer’s premium payments or the policy cash value (formerly known as “non-equity collateral assignment method”.)
This arrangement typically involves a series of loans from the employer to the employee. The loans are used as the source of premium payments. Under the IRS regulations on split dollar, the loan should bear interest based on the applicable federal rate (AFR), which may depend on the term of the loan, but legal counsel should be consulted on selection of the rate.
In a low interest rate environment, making this plan particularly attractive when using short-term loans and demand loans. How the loan rate is selected depends on a number of factors, including when the parties want to “lock-in” the current rates for a period of years (i.e., up to 9 years for mid-term rate, and over 9 years for long-term rate). On the other hand, the parties may consider using the published “blended rate” for a demand note, which may or may not be lower than the “short-term” AFR.
The advantage of the “blended rate” is that the lender can reset the rate every year, rather than lock into the short-term rate (up to 3 years). That is, the blend rate floats, but comes with a risk the loan interest may increase over time.
Some business owners may prefer to ensure predictability of the interest rates (and corresponding the tax consequences of the split dollar arrangement) and, accordingly, may prefer using the term rate from the outset. Another concern with a demand note is that it provides the employer an unfettered right to accelerate full payment of the loan. That is a risk some employees would not want to assume. Again, these elements of loan regime split dollar are matters that the employer and employee should address with their respective tax advisors.
Protective refers to Protective Life Insurance Company, founded in 1907, and its affiliated companies, including Protective Life and Annuity Insurance Company.
Protective® is a registered trademark of Protective Life Insurance Company. The Protective trademarks, logos, and service marks are property of Protective Life Insurance Company and are protected by trademark and/or other proprietary rights and laws.
Life insurance and annuity products are issued by Protective Life Insurance Company, Omaha, NE, in all states except New York, where products are issued by Protective Life and Annuity Insurance Company, Birmingham, AL. Protective Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so. Variable products are distributed by affiliated broker-dealer Investment Distributors, Inc., Birmingham, AL.
Guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company. Product features, availability, and issuing companies may vary by jurisdiction.
Information provided on this website is for general informational and educational purposes only and is not intended as investment, tax, or legal advice, nor should it be considered as a recommendation, endorsement, or solicitation with respect to any product or strategy. Individuals should consult their own qualified advisors regarding their specific situation.
When you visit Protective's websites, we may collect personal information from you via your browser or device, or through the use of cookies, analytics tools, and other technologies. You can exercise your privacy choices by completing a “Do not sell my personal information” request or a “Limit the use of my sensitive personal information” request. Please visit our Privacy Policy for more information about our information practices, including information about your privacy choices.
Investment and Insurance products are: NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, A BANK OR CREDIT UNION | MAY GO DOWN IN VALUE | NOT FDIC/NCUA INSURED | NOT INSURED BY ANY FEDERAL AGENCY | NOT GUARANTEED BY ANY BANK OR SAVINGS ASSOCIATION
