Dealing With Split Dollar Before Regulations Are Final
As lawmakers grapple with finalizing the much anticipated split-dollar regulations, agents in the field are still confused with what to do with plans currently in place.
In a workshop at this years Association for Advanced Life Underwriting meeting, Thomas Bates, vice president of sales for the Todd Organization, Greensboro, N.C., assessed the legislative and regulatory developments that impact split dollar, and gave strategies for working with current clients who are participating in split-dollar plans.
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IRS Notice 2002-8 impacts all participants of split-dollar plans, he said. While it is still unknown what rules will apply to plans implemented prior to Jan. 28, 2002, the notice created some voluntary safe harbors for these plans. The potential benefits of these safe harbors should be analyzed, he said.
Further complicating matters is the recent passage of the Sarbanes-Oxley Act. This impacts directors and officers of public companies, “generally all senior officers of the company,” said Bates. The rules under the act affect loans to covered participants of a split-dollar plan. Since split-dollar plans have elements that are similar to loans, they may be impacted. And, while current balances are protected, future payments into the plan may result in a violation of the act, he explained.
The first step advisors need to take is to educate their clients on their options, Bates said. “Clients are confused right now–if theyre not then theyre just not aware of it. Its a good idea to sit down with them.”
When evaluating collateral assignment equity split-dollar plans put in place prior to Jan. 28, 2002, Bates said his organization will spend time with clients analyzing several different alternatives. First, he will consider what he refers to as a “worst case scenario–what happens if the equity in the policy gets taxed at rollout?”
Then, Bates works through the different safe harbors written into Notice 2002-8. “We look at converting to a loan, and we look at what happens if we roll the policy out before Dec. 31, 2003.”
Bates firm will then evaluate the appropriate economic benefit costs. “We look at what happens to policies that were placed prior to Jan. 28, 2002, after Jan. 28, and then what might happen if we were to write a new plan after the final regulations are out.”
To illustrate the process, Bates shared an example of a contributory collateral split-dollar arrangement entered into just prior to Notice 2002-8 becoming effective.