4024 / When is a split dollar plan that was entered into or materially modified after September 17, 2003 governed by the economic benefit theory and what are the tax consequences?
If a split dollar arrangement is not treated as a loan, the contract’s owner is treated as providing economic benefits to the nonowner. For gift and employment tax purposes, the nonowner and the owner must take into account the full value of the economic benefits provided to the nonowner by the owner, reduced by any consideration paid by the nonowner. Depending on the relationship between the owner and the nonowner, the economic benefits may consist of compensation income, a dividend, a gift, or some other transfer under the IRC.1
The value of the economic benefits is equal to:
(1) the cost of life insurance protection provided to the nonowner;
(2) the amount of any cash value the nonowner has current access to, to the extent that these amounts were not taken into account in previous years; and