4026 / When will a split dollar plan that is entered into before September 17, 2003 found to be “materially modified” so that it is governed by the 2003 regulations?

The 2003 regulations apply to split dollar arrangements entered into after September 17, 2003, and arrangements entered into on or before September 17, 2003, that are materially modified after September 17, 2003.¹ The final regulations provide a nonexclusive list of changes that will not be considered material modifications. This list includes:

(1)  a change solely in premium payment method, for example, from monthly to quarterly;

(2)  a change solely of beneficiary, unless the beneficiary is a party to the arrangement;

(3)  a change solely in the interest rate payable on a policy loan;

(4)  a change solely necessary to preserve the status of the life insurance contract under IRC Section 7702;

(5)  a change solely to the ministerial provisions of the life insurance contract such as a change in the address to send premiums; and

(6)  a change made solely under the terms of a split dollar agreement other than the life insurance contract if the change is dictated by the arrangement, is nondiscretionary to the parties, and was made under a binding commitment in effect on or before September 17, 2003.²

An exchange of policies under IRC Section 1035 is not on the list of nonmaterial modifications. The IRS will not issue rulings or determination letters on whether a modification is material.³

The IRS has released guidance regarding the application of IRC Section 101(j) and Section 264(f) to life insurance contracts that are subject to split dollar life insurance arrangements. According to the IRS, if parties to a split dollar life insurance arrangement modify the terms of the arrangement but do not modify the terms of the life insurance contract underlying the arrangement, the modification will not be treated as a material change in the life insurance contract for purposes of IRC Section 101(j) and Section 264(f) even if the modification is treated as a material modification of the split dollar arrangement for purposes of Treasury Regulation Section 1.61-22(j). In other words, the contract will not lose its grandfathered status.⁴

The final regulations also contain rules on when a split dollar arrangement is considered to be entered into. A split dollar arrangement is entered into on the latest of the following dates:

(1)  the date the life insurance contract is issued;

(2)  the effective date of the life insurance contract under the arrangement;

(3)  the date the first premium on the life insurance contract is paid;

(4)  the date the parties to the arrangement enter into an agreement with regard to the policy; or

(5)  the date on which the arrangement satisfies the definition of a split dollar life insurance arrangement.⁵