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Split Dollar

Split Dollar Life Insurance

A Flexible and Cost-Effective Planning Alternative for Key Employees and Professionals of Private and Non-Profit Organizations

Split dollar life insurance is not a type of policy (like term or whole life) but rather a form of joint ownership of a cash value policy – generally between an employer and an employee.

EBS would welcome an opportunity to work with you to review the compensation and benefit programs offered to key employees and professionals for competitiveness, cost-effectiveness and, specifically, exposure to the 21% excise tax.

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Non-Profit and Privately Held Organizations have multiple compensation and benefits needs:

  • Competing with talent with for-profit or public corporations that can offer a broader range of compensation and benefits programs.
  • Designing performance-based incentive plans aligned with financial and strategic goals.
  • Providing key employees supplemental tax-advantaged savings opportunities.

However, Non-Profit and Privately Held Organizations face a competitive disadvantage:

  • The inability to offer equity compensation, supplemental savings and retirement plans offered by for-profit/public entities.
  • Additional tax and state law restrictions that limit the flexibility of plan design.
  • Non-profit organizations face a 21% excise tax enacted by the Tax Cuts and Jobs Act.
  • Under section 162(m) publicly-traded organizations lose deductions on compensation in excess of $1 million per year.

The solution? Split Dollar Life Insurance.

Benefits of Split Dollar Life Insurance

Split Dollar arrangements represent a flexible and cost-effective planning alternative to cash and deferred compensation.

Participant Benefits

  • A secure, tax-advantaged supplemental savings vehicle free from the risk of forfeiture requirements of Section 457(f) plans.
  • A wide range of competitive investments, including some with downside protection,
  • Distribution flexibility and,
  • A cost-effective supplemental life insurance benefit.

Sponsoring Organization Benefits

  • The flexibility to design a competitive compensation and benefits package,
  • Reduced long-term costs through avoidance of the 21% excise tax and the potential recovery of program costs and,
  • Relatively favorable reporting and disclosure requirements

Structure of the Plan

A contemporary specially designed Indexed Universal Life Insurance contract underlies the structure of the program and provides the key tax advantages.

The policy is owned by the participant, providing superior benefit security and control in comparison to a typical deferred compensation plan.

The policy is funded through premium loans from the sponsoring organization, secured by a security interest in the policy, which are repaid from policy cash value upon termination of employment, or from the policy death benefit.

Key Characteristics of Split Dollar Life Insurance Arrangements

Benefits for the Participant

  • “Roth-like” tax characteristics
    • Tax deferred growth of cash value, and non-taxable withdrawal of benefits (if properly structured and managed)
  • Benefit from the spread:
    • Between cash value growth and loan interest at the low AFR rate
  • Minimal cost:
    • No cost, while interest accrued
    • Tax cost of imputed interest at the low AFR once distributions begin
    • But offset by additional distributions.
  • Financial planning flexibility
  • Investment options:
    • Access to a range of investments, including indexed funds with downside protection
  • Portability and benefit security:
    • Provided by individual ownership
  • Cost-effective life insurance coverage

Benefits for the Plan Sponsor

  • Reduced cost:
    • Premium loans repaid with interest vs. cash compensation expense
  • Elimination of exposure to the 21% excise tax
    • On compensation in excess of $1 million and on “Parachute Payments.”
    • 21% rate tied to the top corporate tax rate
  • Freedom of plan design
    • As a result of relief from Section 457(f) restrictions
  • Favorable Form 990 (or other) disclosure
    • Premium loans repaid with interest vs. cash compensation expense

Issues & Risk

  • Loads and expenses of contract
  • Policy performance risk:
    • Sufficient to repay premium loans and generate the target benefits?
    • Requires on-going performance management to maximize benefits
  • Structuring of loans:
    • Recourse vs. non-recourse
    • Interest to be paid, accrued or imputed?
    • Terms of repayment
  • Early Termination
    • To be clearly addressed in documents
  • Medical underwriting
    • May impact policy performance
  • Tax Compliance
    • Annual Non-Recourse Notice Filing

Get Started

How does a split dollar arrangement apply to my organization?

EBS welcomes an opportunity to work with you to review the compensation and benefit programs offered to key employees and professionals for competitiveness, cost-effectiveness and, specifically, exposure to the 21% excise tax.

EBS handles plan design, carrier comparison, enrollment, underwriting, and ongoing administration.

Contact Us