After raising the specter of higher tax burdens for executives who hold split-dollar life insurance arrangements last year, the Internal Revenue Service this year offered up some handy ways to escape the coming doom. Transitional guidance issued in January says that policies crafted before January 28, 2002, can retain their typically low valuations on current taxable benefits even after the new regulations are passed. And executives who don’t like the changes associated with future final regulations can close out their contracts anytime between now and December 31, 2003, without incurring tax penalties on the remaining cash values.

“The notice gives people the time to review alternatives for recategorization, and a bonus opportunity to go back and say, ‘Is this really the best value?'” says Boston-based Heidi Toppel, a senior executive compensation consultant for Watson Wyatt Worldwide.

Split-dollar arrangements, in which an employer and executive share the cost and benefits of a whole life insurance policy owned by the executive, are part of deferred compensation packages at about 95 percent of Fortune 500 companies, estimates Toppel.

While the final regulations aren’t expected before 2004, the IRS has given some clear clues about what the rules will look like. For example, current taxable benefits of new plans will either have to be valued at federally set rates or treated as company loans to the executive, with both options likely to increase executives’ personal income tax bills. For non-loan-split-dollar arrangements, the notice suggests that final regulations will allow deferral of income taxes to an employee on policy cash values in excess of employer premium payments only until termination of the arrangement, notes Andrew Liazos, a partner in McDermott, Will & Emery’s Boston office.

One thing is certain: the new rules will force more detailed reporting from corporate finance departments. Still, Toppel doesn’t expect the use of the arrangements to decrease, because “they’re still a good deal.”