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Business Planning
Split Dollar Arrangements
Split dollar arrangements let a company provide significant life insurance and retirement benefits to key employees with funds that the company can eventually recover.
Businesses often use non-qualified retirement plans as special rewards for top executives. Split dollar arrangements are one example. They let business owners fund the purchase of life insurance on an executive using corporate dollars that can later be recovered. Split dollar arrangements are an excellent way to provide benefits to non-shareholder executives or even the business owner.
With a split dollar arrangement, the employer advances the executive the premium on a life insurance policy and the two share the cash value and death benefit. Generally the employer has rights to the cash value and death benefit, equal to the greater of its cash advances or cash value of the policy, and the remaining balance, if any, goes to the executive.
The life insurance policy premium is not tax deductible for the employer and is not included in the executive's gross income. The executive gets a financial benefit equal to the term value of the death benefit, so he/she must pay income tax on that economic benefit. Under certain circumstances, excess cash value may be included in the executive's income.
It is also possible to establish a split dollar arrangement using below market rate loan rules. This method is generally used when it is important for the executive to control the cash values of the life insurance policy.