Split Dollar Plan

There are two general split dollar arrangements: A Loan Regime, and an Economic Benefit.

With a Loan Regime split dollar arrangement, the employer pays the premiums for a life insurance policy that is personally owned by the key employee, and the company receives back a collateral assignment in the policy equal to the premiums paid. The premiums are treated as loans to the employee, who either pays interest on the loan or pays taxes on the interest that is “imputed” on the loans.
With an Economic Benefit split dollar arrangement, the key employee is given the right to designate the beneficiary on a life insurance policy that is owned and paid for by the employer. The employee is taxed annually on the “economic benefit” of having life insurance coverage and the death benefit is divided according to the split dollar agreement, which usually states that the business receives the greater of the premiums paid or the policy’s cash value, and the remainder is paid to the employee’s beneficiaries income tax-free.

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