NU Online News Service, March 5, 11:08 a.m. — Washington
Equity split-dollar life insurance came under fire on Capitol Hill recently following revelations that former Enron chairman Kenneth Lay had a large policy paid for by the now bankrupt company.
At a Senate Finance Committee Hearing, Sen. Blanche Lincoln, D-Ark., asked whether split-dollar life insurance, which she described as a taxpayer-subsidized benefit that goes mainly to corporate executives, represents good tax policy.
In a discussion with William F. Sweetnam Jr., benefits tax counsel with the Treasury Department, Lincoln noted that Enron paid a total of $1.23 million in premiums on a $12 million split dollar life insurance policy.
She said Enron would be able to recoup the premium, while Lay could borrow against the policy tax-free or leave the funds to his family tax-free.
In effect, Lincoln said, split-dollar is really a tax-deferred investment wrapped in a life insurance policy, which the tax code allows and the American taxpayer pays for.
She asked whether new Treasury Department rules on split-dollar are appropriate.
Under the new rules, split-dollar life insurance provided as an employee benefit will be subject to a new tax treatment. Although equity split-dollar will be taxed, existing contracts will be grandfathered in.
Sweetnam argued that overturning existing arrangements, which have been in effect for many years without Treasury Department guidance, would be unfair.
But Lincoln noted that split-dollar arrangement are available only to executives. She asked whether it is Treasury’s position that split-dollar arrangements should be encouraged, if they provide no benefits for workers, and no benefits for taxpayers who cover the cost of the credit.
Sweetnam said split-dollar is available to anyone, although he acknowledged that is not same as a qualified retirement plan. When a company sets up a qualified plan, the government requires the company to encourage wide participation.
Frequently, split-dollar is used to secure deferred compensation arrangements, which normally do not go to rank-and-file workers, Sweetnam said.
Sweetnam emphasized that, under the new rules, new split-dollar arrangements will be subject to new tax rules.
However, he said, he does not believe Treasury will look at establishing unfavorable tax treatment for executive compensation arrangements that are not available to rank-and-file workers.