Navigating the intricate world of personal finance can be a little daunting at times, especially when you’re trying to decipher more complex schemes. Among them is a strategy known as the Split Dollar Plan. A Split Dollar Plans is an agreement, typically between an employer and an employee, where a life insurance policy’s premium, cash value, and death benefits are split. The primary appeal here is the versatility it offers – the plan can be structured either as a loan or an endorsement arrangement.
What are Split Dollar Plan
In simple terms, a Split Dollar Plan is a deal, often between an employer and an employee. This agreement splits the premium, cash value, and death benefits of a life insurance policy. What makes it appealing? Flexibility! The plan can take the form of a loan or an endorsement deal. This adaptability makes it a unique tool to tackle various financial challenges.
Split dollar plans have remained a viable tool for businesses seeking to offer unique benefits to key employees.
Split dollar plans have two primary structures:
- Economic benefit regime
- Loan regime.
Lets dive into each of these types in detail.
Economic Benefit Regime
With this arrangement, the employer pays the premium for the employee’s life insurance policy. What’s the catch? The employee will need to count the economic benefit (the life insurance coverage cost) as taxable income. A notable pro of this regime is the simplicity of tax handling. The cons? The possible spike in taxable income might be a concern for some.
The value of the economic benefit is determined using the IRS’s Table rates, which depend on the age of the employee and the amount of insurance protection.
To visualize this, let’s examine a few examples of these rates:
| Age | Cost per $1000 of Protection (2001 rates) |
|---|---|
| 40 | $1.10 |
| 50 | $2.30 |
| 60 | $6.51 |
| 70 | $20.62 |
Loan Regime
On the flip side, we have the Loan Regime. Here, the employer lends the premium to the employee, who will then repay, usually via policy’s death benefits. The pros here include better control for the employee and potentially tax-free death benefits. But, beware of the cons – the complexity of tax implications and potential tax liabilities in certain scenarios.
However, it’s not all sunshine and rainbows. If the loan is deemed to be below-market (i.e., the interest rate is below a certain threshold set by the IRS), the employee could be taxed on the loan interest.
The Annual loan interest rates as of May 2023 are as follows:
| Term of Loan | Applicable Federal Rate (AFR) |
|---|---|
| Short-term (0-3 years) | 3.26% |
| Mid-term (3-9 years) | 2.71% |
| Long-term (more than 9 years) | 2.82% |
Advantages and Disadvantages of Split Dollar
Split dollar plans offer unique benefits to key employees that aren’t available through other plans. Let’s unravel the unique appeal and drawbacks of these plans.
Advantages
Disadvantages
The unique combination of benefits offered by split dollar plans positions them as a compelling option for companies seeking to reward and retain their most valuable players – their key employees.
Alternative to Split Dollar Insurance Plan
There are few alternative for Employers to look into for Split Dollar Insurance plan:
- Executive Bonus Plan (Section 162)
- Group Carve-Out Plan
- Non-Qualified Deferred Compensation (NQDC) Plan
Here’s a quick comparison table:
| Split Dollar Plan | Executive Bonus Plan (Section 162) | Group Carve-Out Plan | |
|---|---|---|---|
| Cost-Sharing Feature | Yes | No | No |
| Cost for Employer | Shared with Employee | Borne by Employer | Borne by Employer |
Wrapping Up
Split dollar life insurance plans, while complex, offer a unique set of advantages. They can be a boon to employers seeking to provide attractive benefits to key employees and to employees looking for robust life insurance coverage.
The journey through the landscape of split dollar plans has been both intriguing and enlightening. Whether you’re an employer seeking competitive advantages, or an employee considering your insurance options, split dollar life insurance plans offer a compelling, though complex, option.
That’s a wrap! Share your thoughts or experiences with split dollar plans in the comments below or on social media, and keep the conversation going!