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Split-dollar is an arrangement for purchasing a life insurance contract where the employee and the company split the premium and death benefit of a permanent life Insurance contract. Normally, the employer pays the amount of the annual cash value increase in the policy, and the employee pays the difference between that amount and the full premium. In the early policy year, before the cash value begins to build up, the employee’s required contribution is substantial. In later years, however, the employee’s contribution may drop to zero. At death, the employer receives the cash value, and the employee’s heir gets the amount at risk, i.e., the difference between the face amount and the cash value. Federal Fast Wage and Tax Facts 2021
Note: Many variations have developed on the “basic plan” outlined above. Often the employer will even pay the entire premium but still split the proceeds at death (referred to as a “noncontributory plan”). Sometimes the employer will permit the employee to contribute a level amount over the expected premium-paying period, rather than the high initial amounts.
Low-Cost Term Insurance
The plan gives the employee what is in effect term insurance at a reduced cost and doesn’t cost the employer anything because the company gets its money back on the employee’s death. The policy’s cash value belongs to the company. Such plans can discriminate in favor of highly compensated employees. Cheapest Life Insurance Companies of 2021
ERISA imposes regulatory requirements upon employee welfare benefit plans, which include split-dollar insurance plans, even though employee welfare benefit plans are exempt from the participation, vesting, and plan termination insurance provisions of ERISA. The Department of Labor has issued regulations that largely exempt split-dollar plans from the reporting and disclosure requirements of the law (DOL Reg. §2520.104).
Since the employer is a beneficiary of the policy, there is no deduction for any portion of the premium that it pays (§264(a)(1)). This is true even though some portion of the employer’s premium payment is a taxable economic benefit to the employee (R.R. 64-328)). Likewise, employees cannot deduct any portion of a split-dollar premium. Moreover, employees are taxed on the total value of the insurance protection received during the year less any payments made by them (R.R. 67-154). However, neither the employer nor the heirs are taxed on the proceeds at death (§101(a) and R.R. 64-328).
Revenue Ruling 64-328
In R.R. 64-328, the IRS decided that the employee receives a taxable benefit under any variety of the split-dollar plan. The tax aspects of the use of dividends from participating policies were covered in R.R. 66-110, and again, the form of the split-dollar plan was deemed to be inconsequential. R.R. 64-328 expressly denies the corporation a deduction for its share of the premiums on a split-dollar plan. However, this ruling may not entirely preclude the corporation from deducting the taxable economic benefit that is reportable by the employee.
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