Split Dollar plan

A Split Dollar plan may provide a cost-efficient way for tax exempt entities to offer selected employees valuable death benefit protection, supplemental retirement benefits, or both.

In simple terms, the business and its employee agree to share the benefits and costs of a life insurance policy. A split-dollar life insurance arrangement can be a powerful planning tool if a business wants to provide executive fringe benefits to their employees.

 
  1. The tax exempt entity enters into a written split-dollar agreement with each selected employee. The agreement specifies the rights and responsibilities of each party.
  2. The plan can be designed to leverage the amount of control you would like to have over the policy. Policy ownership and beneficiary arrangements will be determined by the selection of loan regime or endorsement/economic benefit regime split-dollar plan. 
  3. Depending on the type of split-dollar arrangement, your employee may pay income tax on the economic benefit received or on the imputed interest income of the loan.
     
Considerations for the business
  • The tax-exempt entity has discretion regarding which employees can participate.
  • The plan is generally easy to implement and maintain.
  • Cost recovery may be available. 
Considerations for the employee
  • Depending on the type of split-dollar arrangement, tax-advantaged income may be available from the policy through withdrawals and loans.*
  • The death benefit is income tax-free.
  • A split-dollar plan can be a cost-effective way to obtain survivor benefits and be a possible source of supplemental retirement income.
Businessman and construction worker looking at plans

*Income tax-free loans and withdrawals will reduce the policy’s cash value and death benefit. Distributions are taken through loans and withdrawals, which reduce a policy’s cash value and death benefit and may cause the policy to lapse. Loans are not considered income and are tax-free. Withdrawals and surrenders are tax-free up to your cost basis, provided your policy is not a modified endowment contract (MEC). A MEC policy is one in which the life insurance limits exceed certain high levels of premium or the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code. For policies that are MECs, distributions during the life of the insured, including loans, are first treated as taxable to the extent of income in the contract, and an additional 10% federal income tax may apply for withdrawals made prior to age 59½.