Split Dollar

[Randy Watson]

Has anyone ever hear of a split dollar life insurance agreement between a NQDC plan and a plan participant? This seems very odd to me. Is this even possible? I have practically no experience with split dollar arrangements.

[Mark Whitelaw]

There was an approach being touted back in the days of collateral assignment split dollar that may be what you are referring to.

An executive enrolls in a deferred compensation plan that pays a 0% rate of return. Let’s assume he/she defers $100,000 over several years.

At the same time, separate from the deferred comp plan, the company enters into a collateral assignment split dollar agreement and coincidentally pays the same $100,000 into the policy as premiums.

If the executive died while in both programs the company receives $100,000 in life insurance benefits to informally fund the deferred comp obligation and the executive’s heirs get the balance.

Let’s assume at retirement the policy is worth $175,000. The executive receives the $100,000 from the deferred comp plan to repay the $100,000 in premium advances. The net result is the executive pays tax on the $100,000 and walks away with a life insurance policy with $175,000 of cash value – a value that can be manage tax-free as long as he/she keeps the policy in-force.

It’s been moot since 2003 and there are better/easier ways to accomplish the same objective.

[Guest gdburns]

Randy

What exactly do you mean by "between a NQDC plan and a plan participant"?

Mark's scenario is really between the company and the plan participant with the NQDCas a side issue. Did you mean something more direct?

I do not think that the NQDC plan would itself have the ability to enter into an arrangement of any sort, but it could be possible. However, as Mark pointed out there are better ways to accomplish most things depending on the objective.

[Randy Watson]

Split dollar agreements are being offered to some participants in a NQDC plan. The plan is the owner of the life insurance policy and pays the entire premium. An endorsement is filed with the life insurance company giving the individual rights to 1/2 of the death benefit. The individual then recognizes the cost of the life insurance protection each year. When the death benefit is paid, 1/2 goes to the plan and 1/2 goes to the individual. That's it, just a death benefit is available. Is there some hidden benefit to doing this rather than having the company own the policy (other than using assets of the plan to purchase the policy)?

[Guest gdburns]

What does the Plan hope to gain by doing this?

What does the employee hope to gain? Why not just buy a policy for 1/2 the DB and pay 1/2 the premium, since 1/2 the DB is what the employee will be getting?

Who gets the Cash Value? Who has rights to that CV? What about the taxes on the CV?

There must be more to this scenario to go to the trouble.

[Mark Whitelaw]

Is it the plan that owns the policy, or the plan's rabbi trust informally funding the plan that is the owner? It's quite common for a company to split part of the death benefit of their policy, or the trust's policy, with the insured via an endorsement split dollar agreement. The exec gets cheap insurance - taxes on the imputed income using the insurance company's alternative term rates. The company or trust gets the balance and 100% of the cash value. If the rabbi trust is the owner and beneficiary of the policy the death benefits to the trust simply increase the assets to informally fund the plan obligations. Excess funds go to the plan sponsor, no differently than if the company had been the owner.

I've never seen a plan own the policy, especially in multi-life plans where you want to take an aggregate funding approach. You never want to link policy values to plan values - an ugly type of plan design some insurance companies promoted for novice agents. It's better to index the plan value to funds and separately manage the informal funding assets. Put another way, does a CFO really want to turn both sides of the balance sheet over to the participants? Not if they want to keep their job. Let the participants dictate the liability, let the CFO control the company's assets to informally fund the liabilities. Or the saying I used when teaching classes on informally funding deferred comp plans with life insurance - The plan is not the policy and the policy is not the plan.

[Guest gdburns]

Under the new rules, wouldn't the cash value build up get taxed?

[Mark Whitelaw]

Not if the policy is held to death. You do have different taxable issues if you transfer ownership, surrender or are dealing with off-shore insurance. But no changes to the bread and butter uses of life insurance.

[Kirk Maldonado]

Mark Whitelaw:

Isn't the cash buildup subject to the alternative minimum tax?

[Mark Whitelaw]

Yes - always has been.