Compliance November 1, 2001

IRS Offers Split-Dollar Guidance

January 10, 2001 (PLANSPONSOR.com) - In a move that has implications for executive benefit programs, the IRS has issued interim guidance on the tax treatment of split-dollar life insurance contracts, and is looking for comments from interested parties.
Reported by

The guidelines appear to offer more latitude in how to treat the offering from a tax standpoint.

Split-dollar arrangements are generally offered as a benefit to senior and mid-level managers. Employers and certain employees share the cost of life insurance contracts that, unlike the more common group term life arrangements, generally have a surrender value and as such are a form of savings.

The tax implications of split dollar arrangements can be complicated at least in part because the employer’s contribution can be characterized as:

  • a loan to the employee
  • compensation or
  • an investment for the employer’s own account.

It’s the first formal direction from the IRS since 1996.

Among other things, the IRS has proposed:

  • Allowing taxpayers to value contracts on the basis of tables published by the insurance companies that sell split-dollar life insurance contracts.
  • Eliminating a long-standing table used to value split-dollar life insurance contracts, replacing it with one that better reflects current mortality rates.

The IRS was concerned that the old table was understating the economic benefits realized by the employees.

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