The Internal Revenue Service has published draft regulations that could affect use of split-dollar life insurance in non-qualified deferred compensation arrangements.
The proposed rules, published in the Federal Register, would implement provisions of the American Jobs Creation Act of 2004. They would create a permanent version of interim guidance that the IRS issued in 2005, 2006 and 2007.
The IRS already has issued final rules dealing with nonqualified plan violations, but the final rules do not tell taxpayers how to calculate what they actually owe, officials write.
One section deals with split-dollar life insurance arrangements.
“The amount deferred under a split dollar life insurance arrangement would be determined based upon the amount that would be required to be included in income in a future year under the applicable split-dollar life insurance rules,” officials write.
“Determination of the amount includible in income would depend upon the federal tax regime and guidance applicable to such arrangement.”
Grandfathered arrangements may be subject to rules given in guidance issued in 2002.
For other arrangements, “the amount includible in income generally would be determined by applying the split-dollar life insurance rules to the arrangement in conjunction with the general rules providing assumptions on payment dates of deferred amounts,” officials write.
However, in the case of an arrangement subject to 26 Code of Federal Regulations Section 1.7872-15, which deals with split-dollar loans, “to the extent the rules regarding time and form of payment and other payment assumptions under these proposed regulations conflict with the provisions of Section 1.7872-15, the provisions of Section 1.7872-15 would apply instead of the conflicting rules under these proposed regulations,” officials write.
As indicated in a notice issued in 2007, “the portion of the benefit provided under the split-dollar life insurance arrangement consisting of the cost of current life insurance protection is not treated as deferred compensation for this purpose,” officials write.
Meanwhile, the nonqualified plan correction guidance, given in IRS Notice 2008-113, discusses topics such as which service providers are eligible for relief; eligibility for relief for service recipients that are experiencing financial problems; corrections of failures that occur during the same taxable in which the failure occurs; and relief for failures involving limited amounts.