A New York Times news report said these split-dollar policies have apparently fallen prey to a prohibition in the Corporate Responsibility Act of 2002 against company loans to executives.
Tax lawyers and compensation experts now believe that the insurance policies qualify as “loans” barred under the law because the company involved is eventually reimbursed for paying the premiums, the Times said. The uncertainty over the policies has virtually halted their sale pending clarification by the government.
According to the Times, the company typically pays close to 100% of the premiums, which grow tax-free within the insurance policy and over a decade or two become a mountain of cash. When the executive retires, the corporation is repaid – without interest – from the cash buildup for the millions it has contributed in premiums.
The policies are set up so that the remaining cash pays for premiums for the rest of the executive’s life, leaving the death benefit for his estate. Alternatively, after the corporation has been repaid, the executive can make regular tax-free withdrawals from the policy and spend the money during retirement, although the executive must take care to leave enough cash in the policy to continue paying premiums.
If the policy lapses, the loans become taxable.
The Times said that the split-dollar policies pop up in more places than just the marquee companies such as Polo Ralph Lauren and Stewart’s firm.
A search of proxy filings with the Securities and Exchange Commission found that more than 700 public corporations are providing some form of split-dollar compensation for executives this year, the Times said.
The principal life insurance trade groups and many consultants argue that Congress did not intend to include the life insurance policies in the ban on loans to executives, the Times said. As evidence, they say that life insurance is not specifically mentioned in the law.
But Senator Charles Schumer, the New York Democrat who wrote the section of the law dealing with executive loans, said through a spokesman that he fully intended to ban the life insurance arrangements.
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