FAQ: Split Dollar Plans
What is Split-Dollar Life Insurance?
Split-Dollar Life Insurance is a form of life insurance that provides retirement and death benefits as part of an employee's compensation. Under a split-dollar agreement, the employee and the employer share the rights to the policy's cash surrender value and death benefits. The employer and the employee may also share premium payments. If the employer pays the entire premium, the employee may need to recognize taxable income each year in accordance with federal income tax regulations.
Split-dollar arrangements may be structured in a number of ways. The two most common types of split-dollar arrangements are:
Collateral Split Dollar
The employer owns the policy and controls all rights of ownership. Under these arrangements, the employer endorses of the portion of the death benefit to the employee or his or her designated beneficiary. Typically, the employer holds the policy until the employee's death. At that time, the employee's beneficiary receives the designated portion of the death benefits, and the employer receives the remainder of the insurance proceeds.
The employee owns the policy and controls all rights of ownership. Under these arrangements, the employer typically makes a interest-bearing loan to the employee to provide the funds needed to purchase a life insurance policy. The employee assigns the cash value or some other interest in the policy as collateral on the loan. When the employee dies, the loan is repaid with the insurance proceeds.
What is Economic Value?
A participant in a split-dollar arrangement is taxed on the economic value of the employer-sponsored life insurance coverage. The economic value is reported as imputed income to the participant on Federal Form W-2 or Form 1099.
Generally, the economic value of insurance coverage increases as the employee ages because the individual has a higher statistical rate of mortality.
How is Split Dollar Reported for Tax Purposes?
For federal tax purposes, the economic value of the insurance assigned to the participant is includible in the participant's gross income. The taxable amount using Table 2001 is reported on Federal Form W-2 in boxes 1, 3 and 5 and is subject to FICA tax accordingly.