Split-Dollar Plans and the Sarbanes-Oxley Act

Split-Dollar Plans and the Sarbanes-Oxley Act

Since the Sarbanes-Oxley Act’s interpretation and administration is within the jurisdiction of the Securities and Exchange Commission, the final split-dollar regulations do not address this issue. Most experts seem to think that collateral assignment split-dollar plans and split-dollar loan arrangement would fall under this Act. It is unlikely that the Act would apply to endorsement-type split-dollar arrangements because the employer owns the policy under this arrangement and there is no loan of any premiums—the employee…

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What is Switch-Dollar?

What is Switch-Dollar?

Here is a short explanation to help you in understanding what a switch-dollar plan is. It is a hybrid plan that starts as non-equity collateral assignment split-dollar and then switches to a loan at some point. The switch may occur at the point where the cash value of the policy exactly equals the premiums paid, or when the REB costs start to get expensive in relation to the loan interest costs. By proceeding in this…

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Is an Economic Benefit Crawl Out Viable?

Is an Economic Benefit Crawl Out Viable?

An economic benefit crawl out is simply a contributory collateral assignment split-dollar arrangement in which the REB payments made by the policy owner are considered to reduce the collateral assignee’s interest. In the authors’ opinion this strategy is unlikely to pass IRS muster. When the policy owner pays the REB cost each year, it is paying for that year’s death benefit protection that is being provided. To also use the REB payment to reduce the…

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Split-Dollar With Survivorship Rates

Split-Dollar With Survivorship Rates

It is anticipated that for new plans, the IRS will provide split-dollar life insurance premium factors in addition to individual premium factors and will permit all of these new rates to be used to measure the term costs in plans entered into prior to September 17, 2003 as well as in new plans. The authors calculated the survivorship term rates based on Table 2001 factors and found that they are actually lower than one insurer’s…

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REB Cost in a Policy

REB Cost in a Policy

The Final Split-Dollar Regulations state that the non-owner does not receive any investment in the contract, or basis, for the payment of the reportable economic benefit into the policy. So for split-dollar arrangements that are subject to the final regulations, there is no basis for the REB cost regardless of whether it is paid or the insured is taxed on this amount. For split-dollar arrangements that are not subject to the final regulations, however, the…

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Loan Arrangement Consequences and Interest

Loan Arrangement Consequences and Interest

If adequate interest (based on the Applicable Federal Rate or AFR) is charged on a loan arrangement, then Code section 7872 generally does not apply (i.e., the loan is not a below-market loan). As a result, especially when interest rates are low, some planners suggest that the best course of action may be to arrange the transaction as a term loan that states adequate interest so that the loan arrangement interest rates can be locked…

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Income Tax Consequences and Employers

Income Tax Consequences and Employers

With income tax consequences, the amount, if any, received by the employer in excess of its aggregate premiums appears not to be taxable to the employer pursuant to the Code section 101(a) death benefit exclusion. In contrast, the death benefit proceeds (despite Code Section 101(a)) are excluded from the beneficiary’s gross income only to a certain extent. The amount excluded is that portion of the current life insurance protection provided to the nonowner to the…

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Grandfathering Provisions for Split-Dollar Plans

Grandfathering Provisions for Split-Dollar Plans

The answer depends on when the grandfathering provisions parties entered into the equity split-dollar arrangement. If an employer and employee entered into an equity split-dollar plan before January 28, 2002, and the plan was terminated on or before December 31, 2003 by the employee repaying the employer’s premium advances (i.e., a rollout), any then existing policy equity was not subject to tax. That provision was a big opportunity for employees in mature plans with a…

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Tax Implications of Split-Dollar Life Insurance

Tax Implications of Split-Dollar Life Insurance

The tax treatment of a split-dollar arrangement depends on when the arrangement is first entered into. Generally, for split-dollar arrangements entered into after September 17, 2003, the taxation of the arrangement is governed by the Final Split-Dollar Regulations that were issued in 2003. Split-dollar arrangements entered into before September 18, 2003, are generally governed by revenue rulings and other guidance issued by the IRS between 1964 and the issuance of the final regulations. Treatment under…

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The Requirements of Split-Dollar Life Insurance

The Requirements of Split-Dollar Life Insurance

Assuming that the arrangement is between an employer and employee, there are no nondiscrimination rules that must be met, nor is IRS approval required prior to or after a plan’s installation. Split-dollar can be established for as many employees as an employer desires. No notice must be given to any employee who is not covered. (Securities and Exchange Commission rules require publicly held corporations to disclose split dollar plans on the lives of members of…

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