The Requirements of Split-Dollar Life Insurance

Assuming that the arrangement is between an employer and employee, there are no nondiscrimination rules that must be met, nor is IRS approval required prior to or after a plan’s installation. Split-dollar can be established for as many employees as an employer desires. No notice must be given to any employee who is not covered. (Securities and Exchange Commission rules require publicly held corporations to disclose split dollar plans on the lives of members of the executive group, as noted in the following section.)

Section 409A Requirements of Split-Dollar Life Insurance

Code section 409A provides a strict set of rules that affects any employer-sponsored plan that provides for the deferral of compensation, and potentially impacts certain equity split-dollar arrangements.3 Whether it is employer contributions or executive deferrals of salary, if an arrangement meets the definition of deferred compensation under section 409A and that arrangement contains amounts that were earned or vested after December 31, 2004, that plan must meet section 409A’s requirements. The key features of section 409A are the limitations on distributions from NQDC plans and the standardization of deferral elections.

In Notice 2007-34 the IRS took the position that the equity in employer-sponsored equity split-dollar arrangements constitutes deferred compensation. Therefore, these arrangements are subject to section 409A and must comply with its requirements. If an employer-sponsored equity split-dollar arrangement is not in compliance, then any post-2004 equity is currently taxable, there is a 20 percent penalty, and interest at the underpayment rate (plus 1 percent) applies.

The position taken by the IRS in Notice 2007-34 that the equity constitutes deferred compensation makes it very difficult for parties to employer-sponsored equity split-dollar arrangements to rely on the no inference language in Notice 2002-8 and take the position that the equity is not taxable upon a lifetime termination of the split-dollar arrangement.

Understanding the requirements of split-dollar life insurance helps a consumer make a wiser policy and financial decision.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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