Risk Management

Insurance

IRS Rips Split Dollar
Alix StuartSeptember 1, 2002

The assault on executive-compensation schemes continues. The latest victim is split-dollar life insurance arrangements. The IRS recently proposed regulations that would tax executives more heavily on the benefits of such plans, which could make them obsolete.

Split-dollar life insurance, in which an employer and an executive share the cost and benefits of a whole life insurance policy on the executive, has become a popular way to provide tax-beneficial deferred compensation to senior managers. Such setups are used by 56 percent of Fortune 1,000 firms to reward top brass, according to Vinings Management Corp., a consulting firm based in Marietta, Ga.

In early July, though, the IRS announced new regulations that would tax executives more heavily on the “current economic benefits” of the plan than the vague existing laws do, and would impose taxes on the cash value when the plan is fully transferred to them. Alternatively, executives will be able to own their plans from the outset, but will have to pay federally set interest rates on the premium payments they receive from their employers, since the payments will be treated as loans (although the new corporate-loan ban may affect the viability of this option).

The proposal has encouraged a last-minute effort to tweak–or ditch–split-dollar arrangements, before new and more-onerous tax regulations kick in. The IRS is accepting comments on the proposed rules until October and isn’t likely to finalize them until early next year. “The cost of doing such an arrangement is going to go up in the future,” says Andrew Liazos, director of the executive compensation practice at McDermott, Will & Emery’s Boston office. Any arrangements made before the rules are set in stone, however, will be grandfathered under the current favorable tax rules.

The IRS “hasn’t killed split-dollar,” says Susan McClain, a senior executive compensation consultant at Watson Wyatt Worldwide. “But it’s taken the structure we’ve known for 40-plus years and said, ‘That’s not applicable anymore.’” — A.N.