I can’t believe that 2004 was already a decade ago – things have changed since then! George W. was re-elected for his second term as president of the United States, a massive tsunami hit the Pacific Rim area, and Facebook was in its infancy and only available to college students.
Mixed up in all that was the start of the 2003 IRS rulings on the tax changes made to split-dollar plans – how that was lost in the mix, we’ll never know. Specifically, let’s talk about the changes to “collateral assignment” arrangements.
The IRS changed the favorable tax treatment of the premiums that were paid by the employer on behalf of the employee. These payments became considered loans, and the employee has to pay a “sufficient” interest rate as determined under the regulations, instead of the “interest free” loans that were allowed prior. If the loan doesn’t meet the adequate rate of interest, then regulations have a complex system of deemed interest flowing to the employee as income and then back to the employer as interest.*
Most companies and executives thought this was the end of the split-dollar train, but as Lee Corso would say, “Not so fast, my friend!” If set up properly, split-dollar plans still have a wide array of viability to attract and retain key employees and executives in the business marketplace.
Split-dollar life insurance is widely used in gift and estate planning and can be an important part of the compensation package for key employees. Your clients don't have to cover all their employees – the coverage, amount and terms of the split-dollar arrangement are generally not subject to the nondiscrimination rules of the Employee Retirement Income Security Act (ERISA). Split-dollar plans can be used to:
Put it in Practice: Don’t be afraid of something that happened more than a decade ago. With interest rates at near all-time lows, collateral assignment split-dollar arrangements might be a key to your clients’ recruitment, retention and success for the foreseeable future. Contact the Ash Brokerage Advanced Markets team to get started.
*The Sarbanes-Oxley Act made it illegal for a company that is publicly traded to loan funds to an officer or director, and certain other key employees.
© 2018 Ash Brokerage LLC.