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IRS Issues Final Rules on Split-Dollar Insurance

Contributed By: Block Caron & Lyon LLP
Published: Fall 2003
Page: 1 of 3

The IRS has issued Final Regulations for split-dollar life insurance policies. The Final Regulations are effective for split-dollar arrangements entered into after September 17, 2003. Split-dollar includes any arrangement between an owner of a life insurance policy and a non-owner under which either party pays all or part of the premiums, and one of the parties paying premiums is entitled to recover a portion of those premiums from the policy proceeds.

The Final Regulations provides two (2) mutually exclusive regimes for taxation of split-dollar. The first regime is the Economic Benefit Regime. The second regime is the Loan Regime.

Ownership of the insurance policy determines which regime applies. The person named as policy owner of the insurance contract generally is the owner. Thus, the named owner of the policy determines which tax regime applies. Taxpayers can elect which regime will apply simply by designating a party as policy owner.

Under the Economic Benefit Regime, the Corporation-Employer is named as policy owner. The Corporation-Employer is treated as providing taxable economic benefits to the Employee. These taxable economic benefits include the cost of current life insurance protection, the amount of policy cash value to which the Employee has access, and any additional benefits provided to the Employee. Both the Corporation-Employer, and the Employee, must report these benefits for purposes of income tax, withholding tax, and gift tax.

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