F—Corporate Split Dollar and Roll-Out

Corporate split dollar is a company sponsored benefit in which the company offers life insurance coverage to a key employee. Generally, there are two ownership set-ups in corporate split dollar:
• Collateral Assignment in which the employee owns the policy and the employer helps fund the policy by loaning the employee the premiums. The two primary ways to structure the split dollar loan in a collateral assignment split dollar arrangement are discussed below. Generally, the premiums are paid by the employer annually and the policy values are collaterally assigned to the employer. The plan ends either at death, retirement or some other date (referred to as roll-out or exit), at which point the employer is repaid using the policy values, or a combination of policy values and out of pocket funds. In some cases, it is also possible for the loan repayment to be bonused or forgiven, in which case the employee will recognize income tax on the value of the bonus or forgiveness.
• Endorsement in which the company owns and pays for the policy on the life of a key employee and endorses or “rents” the death benefit to the employee for the term cost of the death benefit, which is significantly less than the full premium on a cash value policy. In the endorsement plan, the company may retain a portion of the death benefit to indemnify itself from the loss of that employee, typically a key contributor to the business. It is possible for the employer to transfer the policy to the employee at some point in the future, such as at retirement. The employee would then pay income tax on the value of the policy, the calculation of which is based on the policy’s cash value at the time of the transfer. Sometimes the employer will “bonus” the value of the policy, in which case the employee will recognize income tax on the value of the policy in the year of transfer. Alternatively, the employer may provide the funds to pay the taxes in the form of an additional bonus. This latter structure is referred to as a double bonus.

Corporate Collateral Assignment Split Dollar. In collateral assignment split dollar, there are two general ways to set-up the plan. The employer makes a loan of the premium to the key executive on a life insurance policy that covers the employee’s life. The policy is owned by the employee and a portion of the death benefit and policy cash value is collaterally assigned to the employer to ensure repayment.

Economic Benefit Regime vs. Loan Regime vs. Switch Dollar (Hybrid). The structure of a collateral assignment split dollar plan has evolved over the years due to changes in regulations that govern split dollar arrangements. Generally, the employee purchases and owns a cash value policy on their life and the employee either pays the term cost of the death benefit (which is less than the full premium), or, in most cases, the employer pays the full premium including the term cost. In the latter case (referred to as economic benefit split dollar), the employee includes the term cost in their income every year since that is considered “imputed income.”