3565 / Can a split dollar arrangement be subject to the Section 409A rules?
Premiums for a split dollar policy should be taxable to the employee under both split dollar and Section 409A rules (making it subject to the Section 409A penalty taxes and interest if the arrangement does not comply with Section 409A requirements in both form and operation). The Tax Court has held that employer-paid life insurance premiums on an employee’s life, where the annual increase in the cash surrender value benefits the employee and the employee also receives annual insurance protection for both the employee and family, will be includable in the employee’s gross income.2 Only an endorsement split dollar (where the participant receives only an interest in a portion of the policy death benefits and pays only an economic benefit tax cost) seems to escape additional taxation under both split dollar and Section 409A tax rules.
1. IRS Notice 2007-34 was issued as the same time as the final Section 409A regulations in April of 2007 and were intended to specifically discuss the application of Section 409A to split dollar life insurance plans in more detail.
2. Frost v. Comm., 52 TC 89 (1969).