10.4.2 Split Dollar Plans
Split dollar plans are utilized to encourage young employees to join a company and for established executives to stay. Split dollar funding techniques generally refer to arrangements by which premiums, cash values, and death benefits in a life insurance policy are split between two or more parties. The plan is a single contract utilizing cash value whole life and term insurance protection.
Under a split dollar insurance plan, an employer helps an employee purchase life insurance. The premiums are shared by both the employee and the employer. In exchange for the employer's participation in paying the premiums, the employee agrees contractually to share the proceeds of the policy. Upon the insured's death, the amount of death proceeds equal to the cash value generally goes to the employer while the balance of the proceeds goes to the insured's beneficiary. However, if the plan is terminated prematurely (before death), the cash value generally goes to the employer to compensate for the portion of premiums paid.
Using a split dollar plan, the employee usually pays, and is taxed on, the reportable economic benefit of the arrangement. The economic benefit is the federal government's view of what the life insurance coverage is worth each year, typically some portion of the premium. The employer pays the remaining premium, retaining some rights to the policy.
