update on split dollar life insurance

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Tax update on split dollar life insurance

by Tony Novak, CPA, MBA, MT
, revised 11/16/2011

Businesses often provide life insurance as part of an executive’s or owner’s compensation package. The arrangement provides unique tax advantages when the business and executive agree to split the premiums or the benefits. Split dollar life insurance is frequently used as an easy and safe way to direct corporate funds to the benefit of an owner or executive without being subject to income taxes. The IRS provided final regulations on split-dollar life insurance arrangements in Technical Decision (T.D.) 9092 in September 2003 that apply to all new executive benefit plans.

The tax treatment of the benefit will be determined in a fairly simple and straightforward manner based on ownership of the life insurance policy:

1) If the executive owns the policy, the employer’s premium payments are treated as a loan to the executive. The executive is taxed on the imputed interest at current market rates.

2) If the employer owns the policy, the employer’s premium payments are considered to provide taxable economic benefits to the executive.

In either case, the life insurance death benefits are paid tax-free if paid to an individual beneficiary or beneficiaries. If the corporation is the beneficiary of the insurance policy, then the proceeds at death are taxable to the business.

Most policies used in this type of benefit plan build cash value that is not immediately taxed to the executive. Investment earnings are not taxed, so these policies typically invest in stocks or other similar investments that are expected to generate substantial growth over time. The executive may elect to make a taxable withdrawal or take a non-taxable loan against the policy’s cash value.

 Elizabeth K. Kaye of the IRS Office of Associate Chief Counsel (Income Tax and Accounting) at (202) 622-4920 can provide more information on T.D. 9092 and Revenue Ruling 2003-105.

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Opinions expressed are the solely those of the author and do not represent the position of any other person, company or entity mentioned in the article. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Tony Novak operates as an independent adviser under the trademarks “Freedom Benefits“, “OnlineAdviser” and “OnlineNavigator” but is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.

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