FROM THE OFFICE OF PUBLIC AFFAIRS

Today, the Treasury Department and the IRS issued proposed regulations on the tax treatment of split-dollar life insurance arrangements. These regulations provide comprehensive rules on split-dollar life insurance, resolving many questions about how these arrangements are taxed.

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 as a type of employee compensation or for making gifts among family members. The tax treatment of split-dollar life insurance has been unclear for many years.

The proposed regulations require a split-dollar life insurance arrangement to be taxed under one of two sets of rules—depending on who the owner of the policy is. If the employee is the owner of the policy, then the employer’s payments of premiums are treated as loans to the employee. Consequently, unless the employee is required to pay the employer market-rate interest on the loan, the employee will be taxed on the difference between the market-rate interest and the actual interest.

If the employer is the owner, the employer’s payments of premiums are treated as the employer providing "economic benefits" to the employee. The economic benefits would include the value of the life insurance protection provided together with any other benefits provided the employee under the arrangement.

As indicated in Notice 2002-8, the proposed regulations will apply only to split-dollar life insurance arrangements that are entered into after the date the regulations are published in final form. Until then, taxpayers may rely on the proposed regulations.

The text of the proposed regulations is attached.