A Split Dollar Life Insurance tax strategy is an arrangement between an employer and an employee (or a key executive) where both parties share the costs and benefits of a life insurance policy. Here are the key components to consider:
1. Structure of Split Dollar Agreements
- Two Main Types:
- Collateral Assignment: The employer pays the premiums, and the employee is the insured. The employer is repaid from the death benefit or cash value.
- Economic Benefit: The employer pays premiums for the policy, and the employee receives the economic benefit of the policy’s value.
2. Tax Implications
- Premium Payments: Premiums paid by the employer can be considered a non-taxable fringe benefit for the employee, depending on the structure.
- Economic Benefit Taxation: Employees may be taxed on the economic benefit of the policy, calculated based on the IRS tables, but not on the premiums paid by the employer.
- Death Benefit Tax Exemption: Death benefits received by beneficiaries are generally income tax-free.
3. Benefits for Employers
- Attracting and Retaining Talent: Split dollar arrangements can be used as a valuable employee benefit, enhancing retention of key talent.
- Cost Recovery: Employers can recover premium costs through the policy’s cash value or death benefit.
4. Flexibility and Customization
- Tailored Agreements: Split dollar arrangements can be customized to meet specific business and employee needs, including funding retirement or succession planning.
5. Compliance and Documentation
- Written Agreements: It’s essential to have a formal written split dollar agreement outlining the terms, responsibilities, and benefits for both parties.
- IRS Compliance: Ensure compliance with IRS regulations to avoid unintended tax consequences.
6. Consultation with Experts
- Tax and Legal Advisors: Engaging with professionals specializing in tax and insurance can help structure effective split dollar arrangements aligned with business goals.
Conclusion
A Split Dollar Life Insurance tax strategy can provide significant benefits for both employers and employees by offering a flexible, tax-efficient way to fund life insurance while enhancing employee compensation packages. Proper planning and compliance are crucial for maximizing these advantages.
Was this helpful?
0 / 0