FROM THE OFFICE OF PUBLIC AFFAIRS
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September 11, 2003JS-726
Today, the Treasury Department and the IRS issued final regulations on the tax treatment of split-dollar life insurance arrangements. The regulations provide comprehensive tax rules for split-dollar life insurance arrangements that are entered into or materially modified after September 17, 2003.
"The regulations provide tax rules that reflect the underlying economics of split-dollar life insurance arrangements,” stated Treasury Assistant Secretary for Tax Pam Olson. “Under these rules, companies cannot use split-dollar life insurance arrangements to provide tax-free compensation to their executives. By insuring that split-dollar arrangements are appropriately taxed, the regulations curb a backdoor form of executive compensation and promote greater transparency.”
A split-dollar life insurance arrangement involves two parties agreeing to split the premiums and/or benefits of a life insurance policy. These arrangements are often used for executive compensation or for gifts among family members.
The final regulations provide that the tax treatment of split-dollar life insurance arrangements will be determined under one of two sets of rules, depending on who owns the policy. If the executive owns the policy, the employer’s premium payments are treated as loans to the executive. Consequently, unless the executive is required to pay the employer market-rate interest on the loan, the executive will be taxed on the difference between market-rate interest and the actual interest.
If the employer is the owner, the employer’s premium payments are treated as providing taxable economic benefits to the executive. The economic benefits include the executive’s interest in the policy cash value and current life insurance protection.
In its report on the Enron Corporation, the Joint Committee on Taxation recommended the finalization of these regulations.
The regulations provide similar loan and economic benefit rules for split-dollar life insurance arrangements between family members or other parties, such as corporations and their shareholders.
Notice 2002-8, which was issued on January 3, 2002, included certain transition rules for split-dollar arrangements entered into prior to January 28, 2002. Those transition rules expire on December 31, 2003.
Treasury and IRS also released today a revenue ruling stating that certain prior administrative guidance on split-dollar life insurance arrangements is now obsolete.
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