Executive Credit Crunch

Like Fairchild, many other companies are in a holding pattern on a variety of issues, waiting for interpretations from Congress or the SEC. Many have suspended the payment of premiums on company-financed life insurance policies for executives, because doing so might be interpreted as extending credit. "We're advising clients not to make the payments until they get clarification," says Tom Bates, a principal in The Todd Organization, a Greensboro, North Carolina-based consulting firm. In fact, many of the insurance companies that sell so-called split-dollar policies are working with customers to delay their payments without the policy lapsing until the issue is resolved.

When — or even whether — SEC guidance will be forthcoming, however, is uncertain. To say the least, the agency has its hands full for the time being. In the meantime, corporate executives and human-resource departments will have to reevaluate their inventory of executive benefits.

But given the extent of abuse at some companies, even finance chiefs like Martin concede that the federally induced reckoning is necessary. "What they're doing is painful," he says, "but it's the right thing to do."

Death of Split Dollar?

One of the more far-reaching issues involving Section 402 of the Sarbanes-Oxley Act of 2002 concerns "split-dollar" life-insurance policies. The Association of Advanced Life Underwriting estimates that as many as 1,600 public companies have invested in such policies for their employees. They are called split dollar because the death benefit and the cash-value appreciation of the policy are split between company and employee.

The company pays the premium and is ultimately repaid when the employee dies or the policy is cashed out. Many of these plans benefit up to several hundred people, says Tom Bates, a principal in The Todd Organization, a consulting firm. "Clients are rethinking their policies. They don't want any specter of loans outstanding to executives or directors." Indeed, Bates is recommending they suspend premium payments until Congress or the Securities and Exchange Commission addresses the issue.

The SEC isn't the only regulator eyeing split-dollar policies. In July, the Internal Revenue Service proposed regulations that would deem premium payments to be loans to executives. It has also been pursuing abusive arrangements, in which companies manipulate policy valuations to shelter income and reduce their taxes. "Anything called split dollar is tainted even if 99 percent of the policies are plain vanilla," says Bates. "The outer-edge transactions have turned the term into a dirty word."

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