Endorsement Split Dollar
This is a type of life insurance where an employer owns the policy and splits the costs and benefits with an employee, who is the insured.
How Endorsement Split-Dollar Works
An endorsement split-dollar, also known as economic benefit arrangements, is a type of split-dollar agreement regarding a permanent life insurance policy. Split-dollar life insurance is typically a written arrangement between an employer and an employee to split the costs, cash value, and death benefits of a life insurance policy. The agreement details what is required of employees, the plan's duration, how the plan will be terminated, and provisions to restrict or end benefits.
For endorsement split-dollar plans, the person insured is the employee, but the employer owns the policy. The employer then endorses a portion of the death proceeds to the beneficiary, also known as giving economic benefits. The value of this benefit is calculated each year. By following the notice and consent requirements of Internal Revenue Code Section 101(j) and including an imputed income line on a W-2 form, employers and employees can ensure tax-free death proceeds.
A split-dollar life insurance plan is not a policy. It is a contract. Generally, employers can terminate the contract in two ways: an employee's death or at a date agreed upon in the agreement. Split-dollar arrangements can also be between a corporation and shareholder.
Example Of Endorsement Split Dollar
A company can decide to create an endorsement split-dollar arrangement with a key employee such as an executive to minimize the cost of losing them if they pass away. For example, a company might buy a $5 million whole life insurance for a 50-year-old CEO. The policy is a $133,400 annual premium for 13 years, for a total of $1,734,200 in premiums. The life insurance plan will terminate upon the death of the CEO.
If the CEO dies at age 51, the company will get the one premium they paid, $133,400. The CEO's beneficiary would receive the difference of the total plan, which is $4,866,600. If the CEO dies at age 67, the company will get back a cash value of $2,136,154, and the CEO's beneficiaries would get $3,376,482. These cash values get higher than the total premium cost with more years.
Significance Of Endorsement Split Dollar
Employers can use endorsement split-dollar life insurance as a reward to key employees. It can also help retain employees and cover other benefit plans, such as nonqualified benefit plans. Nonqualified plans will tax the beneficiary on benefits paid at ordinary income tax rates. Split-dollar arrangements can also include pre-retirement and post-retirement benefits.
An endorsement split-dollar insurance provides the employee additional financial security. Employees can leverage support from corporate dollars to help pay for personal life insurance. This arrangement can be beneficial, especially if the company is in a lower tax bracket than the employee.
For employers, a split-dollar plan protects them from costs related to losing an essential employee. Additionally, it is:
- Flexible and allows employers to select who participates
- Easy to administer and does not require IRS approval
- An asset on the balance sheet and grows on a tax-deferred basis
History Of Endorsement Split Dollar
Although split-dollar arrangements have been around for many years, the IRS didn't publish regulations regarding an endorsement split-dollar plan until 2003. These new regulations explained endorsement split-dollar and collateral assignment as two different acceptable arrangements. It also removed some prior tax benefits.
Endorsement Split Dollar vs. Collateral Assignment
Both terms are types of split-dollar life insurances. The main differences are who owns the policy and the primary rules that govern the taxation of the arrangements. For an endorsement split-dollar, the employer owns the policy. In a collateral assignment, the employee owns the policy. With the latter, the employer is lending premium payments to the employee.
A collateral assignment is also known as a loan regime because it follows the loan regime regulations for taxation. The employer secures their premium advances with a collateral assignment of the policy. The endorsement split-dollar follows the economic benefit regime for taxation.