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 extent the cost for such protection (REB) was paid by the nonowner or the value of such protection was taxed to the nonowner as an economic benefit. Therefore, the entire employee death benefit would be taxed to the beneficiary if the employee never contributed or paid tax on the REB cost.
Income tax consequences are a piece of what to consider when you look at the Types of Split-Dollar Plans.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM