IRS Hands Down Final Split-Dollar Regulations

September 12, 2003 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) and the US Treasury Department have issued TD 9092 providing the final regulations on tax treatments for split-dollar life insurance arrangements.

>Under a split-dollar life insurance arrangement, two parties agree to split the premiums or benefits, or both, of a life insurance policy.  The pool of assets is then held by the life insurance company, effectively placing the cash value beyond the reach of the employer or the employer’s creditors.  Such an arrangement often makes these policies popular vehicles to compensate employees, especially corporate executives, or to make gifts to one or more family members.

The final regulations – applicable to split-dollar arrangements entered into or modified after September 17, 2003 – provide that the tax treatment of split-dollar life insurance arrangements will be determined under one of two sets of rules, depending on who owns the policy. Namely:

  • If the executive owns the policy – the employer’s premium payments are treated as loans to the executive. Therefore, unless the executive is required to pay the employer market-rate interest on the loan, the executive will be taxed on the difference between the market-rate interest and the actual interest.
  • If the employer owns the policy – the employer’s premium payments are treated as providing taxable economic benefits to the executive. The economic benefits include the executive’s interest in the policy cash value and current life insurance protection.

Additionally, the regulations provide similar loan and economic benefit rules for split-dollar life insurance arrangements between family members or other parties, such as corporations and their shareholders.

“The regulations provide tax rules that reflect the underlying economics of split-dollar life insurance arrangements,” stated Treasury Assistant Secretary for Tax Pam Olson. “Under these rules, companies cannot use split-dollar life insurance arrangements to provide tax-free compensation to their executives. By insuring that split-dollar arrangements are appropriately taxed, the regulations curb a backdoor form of executive compensation and promote greater transparency.”

In addition, the IRS released Revenue Ruling 2003-105 that makes obsolete   prior administrative guidance on split-dollar life insurancearrangements.   A copy of the final split-dollar regulations can be found at  http://www.treas.gov/press/releases/reports/js726attachment2.pdf .

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