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Nearly a year after its release, Notice 2001-10 has been revoked and replaced with the new Notice 2002-8.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.”