NU Online News Service, Sept. 12, 2003, 4:23 p.m. EDT — Washington

The Treasury Department has issued long-awaited final rules on split-dollar life insurance arrangements, and it appears to have rejected industry requests to provide policyholders with transitional relief.

“Under these rules, companies cannot use split-dollar life insurance arrangements to provide tax-free compensation to their executives,” says Pam Olson, assistant Treasury secretary for tax policy.

“By insuring that split-dollar arrangements are appropriately taxed, the regulations curb a backdoor form of executive compensation and promote greater transparency,” she says.

The Association for Advanced Life Underwriting and National Association of Insurance and Financial Advisors, both of Falls Church, Va., had asked Treasury to extend the current safe harbors relating to existing split-dollar arrangements for one year, until Dec. 31, 2004, so that policyholders could adjust to the new regulations.

Tom Korb, director of government affairs for AALU, says agents will continue to work for an extension, but he adds that language in the Treasury Department’s release is not promising.

In the release, Treasury notes that certain transition rules for split-dollar arrangements entered into before Jan. 28, 2002, will expire Dec. 31.

In addition, Treasury says, some administrative guidance on split-dollar arrangements is now obsolete.

Under the final regulations, the tax treatment of split-dollar arrangements will be determined under one of two sets of rules, depending on who owns the policy.

If the executive owns the policy, the employer’s premium payments are treated as loans to the executive. Unless the executive is required to pay the employer market-rate interest on the loan, the executive will be taxed on the difference between the market rate and actual rate.

If the employer owns the policy, the employer’s premium payments are treated as providing taxable economic benefits to the executive, which include the executive’s interest in the policy cash value and the current life insurance protection.

Split-dollar arrangements came under heavy congressional scrutiny early this year when it was revealed that former Enron Chairman Kenneth Lay benefited from a large split-dollar policy.