10.4.2 Split Dollar Plans
Even though split dollar plans are no longer sold, you should know what they are. Split dollar plans were utilized to encourage young employees to join a company and 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 by two or more parties. They were one of the least expensive and most effective methods to help fund buy-sell agreements.
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 benefits of the policy.
Using a split dollar plan, the employee usually paid, and was 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 paid the remaining premium, retaining some rights to the policy.
