IRS Proposes Big Split-Dollar Changes

This treatment would apply if the payment were made either directly or indirectly by the non-owner to the owner, the payment were a loan under general principles of federal tax law, or if a reasonable person would expect repayment in full, and the repayment would have to be made from, or were secured by, the policy’s death benefit proceeds or its cash surrender value.

If the loan provided for sufficient interest, it would be subject to the general rules for debt instruments, the IRS says.

If the loan did not provide for sufficient interest, it would be treated as a below-market-rate loan.

In general, the IRS says, interest on a split-dollar loan would not be deductible by the borrower.

“Unless the employee is required to pay the employer market-rate interest on the loan, the employee will be taxed on the difference between the market-rate interest and the actual interest,” the IRS says.

Grandfather Clause

The proposed rule would apply to split-dollar arrangements entered into after the proposed rule was published as a final regulation, and to existing arrangements that are “materially modified” after the final publication date, the IRS says.

However, the IRS is seeking comments on whether certain material modifications could be disregarded in determining whether an existing arrangement should be treated as a new arrangement.

At this writing, insurance groups were still analyzing the proposed rule.

The text is available on the Web at //www.ustreas.gov/press/releases/docs/regtext.pdf