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Life Health > Life Insurance

New Split Dollar Notice Unveiled

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In a move that should help tamp down the speculation around the future of split dollar, the Treasury Department and the Internal Revenue Service have released Notice 2002-8, providing further guidance on the tax treatment of split dollar arrangements.

The notice is open for comment until April 28, 2002.

Nearly a year after its release, Notice 2001-10 has been revoked and replaced with the new Notice 2002-8. The only carryover from the last notice is the use of Table 2001 rates in lieu of Table PS 58, says Dave Downey, president of The Downey Group, Champaign, Ill. Downey also serves as chairman of the Association for Advanced Life Underwriting’s split dollar task force, which is working with the Treasury Department on the development of the new rules.

A concern practitioners had last year was whether or not the IRS would “grandfather” existing split dollar plans under the old rules.

“The Treasury was responsive to the requests made by the industry to provide some reasonably generous grandfathering so that we could keep the integrity around the sales that were made,” says Lawton M. (Mac) Nease, president of Nease, Lagana, Eden & Culley, Inc., Atlanta, Ga. Nease also serves on the AALU’s split dollar task force.

“It’s certainly not everything that we would like to have, but I think it’s reasonable,” he says.

Under the Notice, older plans that are in place prior to Jan. 28, 2002, may continue to use the insurance company’s lower published term rates rather than Table 2001 for the remaining life of the plan, explains Nease.

“For plans entered into after Jan. 28, but before the effective date of the new regulations,” he continues, “there are certain requirements the insurance company has to meet for their rates to be allowed.”

Some of those requirements stated in the Notice include making those term rates available to all who apply for term coverage with the insurer, and distributing the term product regularly through normal distribution channels.

“So, that is a huge advantage existing plans will have over plans that are put in place after new regulations are published,” says Nease.

“Our concern was the integrity of the promises of the industry,” says Downey.

“There’s an incredible variety of split dollar life insurance plans that have been put in place over the last 40 years,” he continues. “It was important to have those promises be able to be met, and we think the Treasury was quite forthcoming on looking at it that way.

“As a task force, that was our prime concern,” says Downey. “We think we got the right result. Old plans are going to be treated differently from new plans.”

Notice 2002-8 provides clarification on the tax treatment of the different types of split dollar plans, he says.

“There are two kinds of split dollar, there’s the endorsement method where the business is essentially the owner of the policy and there’s collateral assignment, where the insured or a third party is the owner,” he says.

“Going forward on new arrangements, you have to treat the two kinds of plans in a completely separate way,” Downey explains.

“Depending on the nature of the plan, you are one or the other,” he says.

“From an employee’s standpoint, if you do an endorsement method the insured will report an economic benefit as he had in the past,” says Nease. “This benefit is measured, depending on when the plan was put into place, by either the insurance company’s rates or the table,” he says.

“Upon plan termination,” Downey explains, “any gain in the policy over what the employee has to pay back to the employer will be immediately taxed under section 83.”

Nease describes the other option: “Under a collateral assignment method after the final regulations are published, the premium will be treated as a loan to the employee and the employee will have to report the imputed interest of that loan as income.”

Downey notes that upon plan termination in a collateral assignment, when the employer recovers its costs there is no tax to the employee.

“If you just think about it as an employer truly loaning you money to buy a policy, and you have to report the imputed interest on the loan as income every year, then one day you pay the employer back,” says Nease.

There is one part of the Notice that specifically states that for split dollar plans entered into prior to Jan 28, 2002, the Service will not consider transfers of policies as a taxable transfer if the arrangement is terminated prior to Jan. 1, 2004.

“This has particular value for plans that are maybe 10 or 15 years old,” says Nease. “They’re giving you two years to decide. They gave us some time to work these things out,” he says.

“Some of us have been doing this a long time and may have 100 clients in this position,” notes Nease.

“We think this is a reasonable time to be able to make these decisions and we think that was an important part of what the Treasury did,” says Downey. “We think we got a fair dialogue, they listened to us, and they came out with something we can live with.”

The notice can be found at

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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