The good news is that the new proposed regulations on split dollar life insurance arrangements only address prospective plans, according to Albert J. Bud Schiff, president of the Association for Advanced Life Underwriting, so it looks like existing plans will follow the rules stated in Notice 2002-8.
The proposed regulations state that any split dollar arrangement entered into prior to the publishing of final regulations may follow the rules set forth in Notice 2002-8. (See NU, July 15.)
But the Treasury Department did make some changes to how split dollar will be treated prospectively, while clearing up some of the uncertainties seen in the previous Notice, according to experts in the industry.
“In 2002-8, they introduced two different tax regimes. Now in the proposed regulations they give it a lot more detail,” says Keith Buck, an advanced sales attorney with The Hartford, Simsbury, Conn., who is also on the American Council of Life Insurers split dollar task force.
“Basically, the economic benefit regime applies to endorsement split dollar and non-equity collateral assignment split dollar arrangements,” Buck says. Therefore, he adds, equity split dollar arrangements will be treated under the loan regime. “Its treated as a loan, and you have imputed interest.”
One of the major changes seen in the proposed regulations is the treatment of employee equity buildup in equity split dollar arrangements. The phrase “economic benefit” was formerly associated with the term costs of the insurance coverage for an employee. Now, the proposed regulation makes it clear that equity is also an economic benefit that should be recognized as its received every year, according to Doug Lawson, 2nd vice president, advanced sales, at Travelers, Hartford, Conn.
“We were hoping that under the proposed regulations you could defer the recognition of that equity every year,” he says.
Since some form of tax will be paid on any economic benefit the non-owner receives (including cash value growth), some professionals feel that this is one way the IRS will try to tax the inside buildup of cash value in a life insurance contract, says Buck.
Lisa ODay agrees and feels that this is a part of the proposed regulation that should be revised. ODay, vice president of advanced sales, at Jefferson-Pilot, Greensboro, N.C., says, “This creates a tax in equity for life insurance. I think this is something wed like to see done away with.”
But Mark Teitelbaum, 2nd vice president of advanced sales at Travelers, disagrees. “I think there is some merit to how the IRS is looking to tax this; after all it is a benefit that is being bestowed upon an employee.”
Another change that has drawn some attention is the clarification that a non-owner will not receive any basis in the life contract for contributions made for the economic value of the life insurance, says Schiff.
“Theyve indicated for the first time that the employee gets no basis, and thats true whether the economic benefit cost is imputed to them, or if they contribute that amount,” adds Buck.