Split Dollar Life Insurance: What to Know

Is your organization struggling with executive turnover? 


All sorts of factors can lead to a key employee walking out the door.  But usually one thing is true – the person who leaves doesn’t feel valued enough.

If you’re a nonprofit organization, this problem is even more prevalent.

The structure of your company doesn’t allow for the same sort of benefit packages and equity that for-profit organizations can offer – and that’s not going to change.

But, there is something you can do. 

Consider the use of a split dollar life insurance plan.  We cover the basics in our video found here.

If you’re looking for the details, we recommend you download our white paper, “Why Non-Profits Are So Interested in Split-Dollar Life Insurance—Should You Be, Too?”.

Not enough time on your hands to go through the download process – we get it.

The takeaway message:

  1. The comparative tax advantages of a life insurance-based program: Section 457(f) programs trigger income taxation to the participant on the value of the entire benefit when vested, regardless of when the benefits are paid. As a result, virtually all Section 457(f) plan benefits are paid in the form of a lump-sum upon vesting. A split-dollar program can be designed to provide non-taxable supplemental income timed to meet the participant’s needs (if the contract is properly structured and administered).
  2. The avoidance of the Section 457(f) requirement for “substantial risk of forfeiture:” Under a loan-regime split-dollar arrangement, the sponsoring organization (rather than the IRS) can design the vesting and forfeiture provisions to meet the organization’s retention objectives in a manner responsive to the participant’s needs.
  3. The reduced exposure to the new Section 4960 21% excise tax: A Section 457(f) plan can trigger the excise tax if the value of the participant’s benefit upon vesting is more than $1 million, or if the benefit represents an “excess parachute payment” (even if less than $1 million). Loans made to participants under a split-dollar arrangement are not subject to the excise tax.
  4. Greater benefit security: Under a loan regime split-dollar arrangement, the participant owns the underlying life insurance contract from day one, with an assignment to the sponsoring organization of an interest in policy values related to the premium loans until the loans are repaid. In the case of a Section 457(f) plan, the Participant’s rights to benefits are exposed to the claims of the sponsoring organization’s creditors in the event of bankruptcy or insolvency.
  5. The relatively favorable Form 990 disclosures: Compensation expense related to a Section 457(f) plan is disclosed in Schedule J twice; at the time the benefits are accrued, and again upon payment. Under a loan regime split-dollar arrangement, the sponsoring organization’s contributions are converted from an expense to an asset, reported as a loan on Schedule L. Only the relatively modest annual imputed interest to the executive is reported as compensation expense on Schedule J.


Don’t let your organization lose out on top talent due to poorly designed executive compensation programs.  You can give us a call to discuss whether split dollar is the right solution for your company.