Split-dollar arrangement

How it works

Federal rules define a split-dollar arrangement by the relationship between the policy owner and non-owner and the right to recover premium payments. Recovery may come from the contract's proceeds or be secured by those proceeds.

The policy owner and non-owner must account for amounts consistently under the applicable split-dollar rules or section 1.7872-15. A payment from the non-owner to the owner, directly or indirectly, is treated as a loan for federal tax purposes when it qualifies as a loan under general tax principles or a reasonable person would expect full repayment.

Practitioners describe annual tax treatment under the economic benefit method as depending on whether the employer is entitled to the policy's full cash value or only advanced premiums when the agreement ends. Under the loan method, the employee who owns the policy is taxed annually on foregone interest deemed transferred by the employer when interest was not charged.

Where it shows up for owners of businesses, real estate and private investments

Business owners may encounter the arrangement in an employer and employee agreement involving a cash-value policy on the employee's life. Under the traditional arrangement, the employer typically pays premiums equal to the annual increase in cash surrender value, while the employee pays the balance.

Practitioners describe the loan regime as applying to arrangements not taxed under the economic benefit regime, including arrangements traditionally called equity collateral assignment split-dollar.

Points that are easy to confuse

Split-dollar describes an arrangement between a policy owner and a non-owner.

The economic benefit and loan methods describe different tax treatments in practitioner commentary. The economic benefit method is tied to the employer's rights when the agreement ends, while the loan method concerns foregone interest on an employee-owned policy when the employer does not charge interest.

Common questions