Split Dollar Arrangement - Terminated by 12/31/2003?

[J2D2]

Employer and employee enter into a split-dollar arrangement which provides that employer will pay full premiums on life insurance policy owned by employee for 14 years (through 2002). Collateral assignment provides that, if employee terminates or dies before end of 2002, employer will receive the lesser of premiums it has paid or, if less, the cash surrender value of the policy. SDA and collateral assignment provide that, after 2002, employer has no interest in cash value or policy or any right to return of premiums paid. Employee has not yet died or terminated employment. I am not aware of any formal action taken to terminate the SDA or collateral assignment.

By its terms, the SDA is no longer effective; as of 1/1/2003 the entire interest in the policy is held by the employee. Do you think that this situation qualifies as a "termination" of the split dollar arrangement prior to 1/1/2004, as provided in Section IV.4 of IR Notice 2002-8?

[Guest EAKarno]

Not so long as the employer continues to impute the value of the one year term protection into income of the employee. According to the Notice, this will prevent the Service from finding a termination of the arrangement no matter how small the employer's interest. In discussions with Treasury staff who authored the Notice, we were told that this was meant to apply even where the employer's interest had fallen to zero.