NU Online News Service, July 8, 3:45 p.m. — Washington
The Internal Revenue Services has proposed a new rule that could cause headaches for users and sellers of equity split-dollar life insurance arrangements, but the proposed rule seems to protect existing split-dollar arrangements.
The rule would affect employers and employees that split the costs and the benefits of owning life insurance policies that insure the employees.
If the rule takes effect, it will split-dollar life arrangements subject to either of two mutually exclusive tax regimes: an economic benefit regime and a loan regime.
Economic Benefit Regime
Under the economic benefit regime, the owner of the life insurance contract would be treated as providing economic benefits to the non-owner, and those benefits would have to be accounted for fully and consistently by both the owner and non-owner.
The value of the economic benefits, reduced by any consideration paid by the non-owner to the owner, would be treated as value transferred from the owner to the non-owner, the IRS says.
The tax consequences of that transfer would depend on the relationship between the two parties.
The IRS could see the transfer as a payment of compensation, a distribution under Section 301 of the tax code or a gift.
Under the second regime, the loan regime, the non-owner would be treated as lending premium payments to the owner.