Heres a quick question for you: why should financial advisors keep an eye on Jan. 1, 2004?
The best answer isnt because thats the day the 115th Rose Bowl game is scheduled to be played. Its because Jan. 1, 2004, is when IRS rules for split-dollar insurance plans are expected to change. Of course, predicting exactly how they will change is almost as hard as forecasting the final score of that big game in Pasadena more than a year from now.
IRS Notice 2002-8 issued in January appears to soften a stricter and controversial version of earlier IRS rules, which were announced in the waning months of the Clinton administration. Under the earlier rules, split-dollar plans would have been sharply curtailed.
The latest pronouncement by the IRS concerning the appropriate treatment of split-dollar plans appears to offer a measured amount of “grandfathering” for agreements entered into prior to Jan. 28, 2002, and terminated before Jan. 1, 2004. For those of you whose clients have pre-Jan. 28, 2002, agreements, they should be able to continue to use the insurance carriers alternate term rate as the appropriate measure of economic benefit. And if they terminate the agreement prior to Jan. 1, 2004, there should be no taxation on the cash value that passes to the employee.
But, we are well beyond Jan. 28, 2002, and the question becomes does split-dollar still make sense? The answer, I believe, is yes, if you and your clients can be flexible and live with a degree of uncertainty. Specifically, Notice 2002-8 provides that “no inference should be drawn from [the] notice regarding the appropriate Federal income, employment and gift tax treatment of split dollar life insurance arrangements entered into before the date of publication of final regulations.”
Traditionally, split-dollar plans have been a good way for businesses to provide low-cost life insurance and other retirement benefits for their key executives. Split-dollar plans enable an individual to obtain life insurance at a lower cost because his or her company pays a portion of the premium. In most split-dollar plans the employee owns the policy and the company, through an assignment of policy values and benefits, retains an interest in the policy.
Split-dollar plans also are well suited for older executives or those who are rated and would have a hard time finding affordable insurance without help from a business. In addition, split-dollar plans, particularly the endorsement method, can be used in conjunction with deferred compensation and salary continuation plans.
And, while split-dollar continues to be an attractive solution for many clients, agents will need to keep an eye on exactly what the IRS announces between now and Jan. 1, 2004.