Split-Dollar And Deferred Comp A Dynamic Combination
Despite the changing environment in the executive benefit marketplace, attracting and retaining talented professionals remains an important part of a business plan. Businesses need to continue to provide benefits that attract and retain key executives.
The merger of split-dollar and nonqualified deferred compensation can offer a dynamic benefit package to the employee and can offer a measure of control and flexibility to the business. The combination of these tools into one plan could make the difference between getting and keeping the people who are key to the success of the business or not.
But the split-dollar landscape is changing. What we once knew as “endorsement split-dollar” will now be known as “economic benefit regime split-dollar.” The split-dollar proposed regulations issued in July 2002, when finalized, will change the rules for split-dollar.
The type of split-dollar plan will be defined by who owns the life insurance contract. If a life insurance policy is owned by an employer and is part of a split-dollar plan designed to benefit an employees beneficiary, it will likely fall under the economic benefit regime type of split-dollar plan. In this case, the value of the annual economic benefit, as currently measured by Table 2001, will be additional taxable income to the employee.
Separately, there has been some recent scrutiny given to deferred compensation plans. The Jobs and Growth Reconciliation Tax Act of 2003, as reported out of the Senate Finance Committee, contained a set of proposals that would have negatively impacted the use of deferred compensation plans. The proposals would have eliminated the use of rabbi trusts to hold deferred compensation assets and would have restricted the choice of investment options, making a deferred compensation plan much less attractive to the executive.
The final bill, as signed into law, did not contain any provisions that would have been adverse to deferred comp plans or to corporate-owned life insurance (COLI) policies.
To illustrate how split-dollar can be combined with a deferred comp plan, consider the following example. ABC Inc. would like to offer an incentive to its key salesman, Joe, to stay with the company. ABC and Joe agree that a nonqualified salary continuation plan with a pre-retirement death benefit would be an acceptable incentive. ABC and Joe enter into a split-dollar arrangement in which a life insurance policy on Joe, owned by ABC, is used as the funding vehicle. ABC pays the premium on the policy, and Joe is given the right to designate his own beneficiary of that part of the death benefit in excess of the cash value.
If Joe dies prior to retirement, a lump-sum death benefit will be paid to his beneficiaryincome tax free. If Joe leaves ABC Inc. prior to retirement, he receives nothing. Joe will be taxed on the annual economic benefit as measured by Table 2001. Joe will have no right to any portion of the policys cash value.