Split Dollar

[Randy Watson]

Endorsement split dollar arrangement has been in place for at least 5 years. Is it possible that a portion of the policy is grandfathered? If so, how would you figure out how much of the benefit is grandfathered?

[Mark Whitelaw]

"Grandfathered"? ESD is not subject to 409A and was not affected by the 2003 split dollar regs, simply the economic benefit table was updated. Do you have a program where an ESD plan is packaged in with something else that could be subject to 409A?

[Randy Watson]

There's no other arrangement.

So an old (prior to 2003) endorsement split dollar is not subject to 409A?

[Mark Whitelaw]

No. It's merely a way to deliver life insurance protection. Employer owns the policy and its cash value. They endorse a portion of the death benefit to the employee and the employee pays tax on the economic benefit - imputed income, similar to group insurance. Nothing deferred.

[jpod]

Mark Whitelaw: What if the agreement gives the employee the right to buy the policy at termination of employment for an amount equal to the cumulative premiums paid by the employer?

[Randy Watson]

No. It's merely a way to deliver life insurance protection. Employer owns the policy and its cash value. They endorse a portion of the death benefit to the employee and the employee pays tax on the economic benefit - imputed income, similar to group insurance. Nothing deferred.

What about the fact that the employer is agreeing to pay premiums in future years? Isn't that a deferral of income?

[Guest JTK]

Has anyone come across something that explains Notice 2007-34's concepts? Or, perhaps a transcript of Hogans or Tackney describing how to apply it? If so, please post! Thanks.

[Mark Whitelaw]

Review section 2B, paragraphs 2&3 - http://www.irs.gov/irb/2007-17_IRB/ar11.html

My understanding is:

If it's purely a life insurance benefit program - not 409A.

If the employee has a right to buy a policy where the cash values exceed purchase price - its 409A.

So while ESD is not subject to 409A, some of the "bells and whistles" people add may make it so or add FASB issues.

[Guest EXB 1]

I agree with Mark Whitelaw. There is no deferral of compensation under a traditional endorsement split dollar plan. Future premiums have no impact because the arrangement does not provide any equity for the participant. If the intention is to transfer the policy at retirement or some future date, that is a different story.

[Randy Watson]

I agree with Mark Whitelaw. There is no deferral of compensation under a traditional endorsement split dollar plan. Future premiums have no impact because the arrangement does not provide any equity for the participant. If the intention is to transfer the policy at retirement or some future date, that is a different story.

Assume for a moment that you have a split dollar arrangement is NQDC. If that agreement was not materially modified, but premiums were paid on that policy prior to and after the issuance of 409A, would the whole agreement be grandfathered?

[Guest EXB 1]

If the split dollar arrangement is considered deferred compensation and subject to 409(A) and not modified, then only the portion of the account earned and vested by 12/31/2004 could be grandfathered. Future amounts deferred after 12/31/04 would be subject to 409(A).

[Randy Watson]

If the split dollar arrangement is considered deferred compensation and subject to 409(A) and not modified, then only the portion of the account earned and vested by 12/31/2004 could be grandfathered. Future amounts deferred after 12/31/04 would be subject to 409(A).

I understand, but if the employee is entitled to receive the death benefit prior to 12/31/04 and still entitled to receive that benefit after 12/31/04 then what additional amounts have been deferred after the deadline?