split dollar collateral assignment bonus plan

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Split-dollar executive compensation plans: doing it right.

Collateral assignment split-dollar plans offer a unique incentive to retain top company execs.

Companies without stock or other types of equity have a limited toolbox from which to create customized incentive/retention arrangements for top executives. Salary and bonuses are the first line of attack, but they are mostly short-term focused and involve a one-way outflow of funds. Unfunded "457(f)" deferred compensation plans can achieve incentive/retention goals, but are taxable to the executive (and potentially to the business), also involve a one-way outflow of funds and place the risk of underperformance of funding assets on the company rather than the executive.

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Collateral assignment split dollar: The good, the bad, and the ugly

In the realm of executive compensation and employee benefits, collateral assignment split dollar arrangements have emerged as a popular strategy for credit unions seeking to provide valuable perks to key executives while keeping retention goals in mind. While these arrangements offer potential benefits, they also come with complexities and considerations that credit unions must carefully navigate.

Understanding collateral assignment split dollar

Collateral Assignment Split Dollar (CASD) is a compensation and retention arrangement wherein a credit union provides a life insurance policy(ies) to a key executive or employee. Under the CASD arrangement, the employer advances funds to the employee to pay the policy(ies) premiums. These advances are structured as loans, collaterally secured by the cash value and death benefit of the life insurance policy(ies).

The essence of this particular split dollar structure lies in the collateralization of the policy’s benefits; hence the name collateral assigned split dollar. The credit union retains an interest in the policy as collateral for the loan advanced to the employee. In the event of the employee’s death for example, the credit union’s loan is repaid from the policy’s death benefit, with any remaining proceeds typically going to the employee’s beneficiaries.

The good: Benefits for credit unions

Collateral assignment split dollar arrangements offer several potential advantages for credit unions:

Executive attraction and retention: By offering split dollar as part of an executive compensation package, credit unions can attract and retain top talent. This arrangement provides executives with valuable benefits, including potential tax advantages associated with life insurance and retirement income, which can serve as a powerful incentive for long-term commitment.
Customization and flexibility: Collateral assignment split dollar arrangements can be tailored to meet the specific vesting needs of the credit union and cash flow needs of the executive. This flexibility allows for the customization of benefits, premium payment schedules, and other terms to align with the credit union’s strategic goals and the executive’s financial circumstances.
Risk mitigation: By collateralizing the loan with the life insurance policy, credit unions can mitigate the risk of default. In the event of the employee’s death, the credit union’s loan is secured by the policy’s death benefit, reducing the credit risk associated with the arrangement. The CASD arrangement can also serve as key person coverage at no additional cost to the sponsoring credit union.

The bad: Potential drawbacks and considerations

Despite their advantages, these arrangements also present certain challenges for credit unions:

Complexity and administration: Implementing and administering a collateral assignment split dollar arrangement can be complex and requires active management for the life of the plan. Credit unions must navigate various legal, accounting, and tax considerations to ensure proper structuring and execution.
Regulatory compliance: Collateral assignment split dollar arrangements are regulated by the NCUA, particularly regarding concentration risk and accounting rules. Credit unions must ensure compliance with applicable regulations and seek expert guidance to avoid potential issues or adverse consequences.
Tax implications: The tax treatment of these arrangements can be complex and may vary depending on the specific structure and circumstances. Credit unions and executives should consult with tax experts to understand the tax implications of their CASD plan.

The ugly: Pitfalls to avoid

Credit unions must be mindful of potential pitfalls associated with collateral assignment split dollar arrangements:

Communication and transparency: Clear communication and transparency are essential for the success of these plans. Credit unions must ensure that executives fully understand the terms, risks, and obligations associated with the arrangement to prevent misunderstandings or disputes.
Exploring alternatives: Split dollar arrangements are just one option for providing executive benefits. Credit unions should carefully evaluate exit options for their CASD plans, alternative compensation and benefit strategies to determine the most suitable approach based on their specific needs and objectives.
Seeking professional guidance: Given the complexities involved, credit unions should seek guidance from experienced professionals, including legal advisors, tax experts, and financial consultants, when considering and implementing CASD arrangements.

Collateral assignment split dollar plans can be an effective tool for credit unions to provide attractive executive benefits and incentives. However, they require careful planning, implementation, and ongoing management to maximize their benefits and mitigate risks. By understanding the good, the bad, and the ugly aspects, credit unions can make informed decisions and leverage these arrangements to achieve their strategic objectives.

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What Is Split-Dollar Life Insurance?

Benefits of split-dollar plans, economic benefit arrangement, loan arrangement, terminating split-dollar plans, who owns a split-dollar policy, what is the benefit of split-dollar life insurance, what are the two types of split-dollar plans, the bottom line.

Life Insurance
Policy Types

How Split-Dollar Life Insurance Works

Richard Rosen is a financial planner and an expert in writing about financial planning topics. He has 20+ years of experience as a CFP®.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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Split-dollar life insurance is a strategy that allows the sharing of the cost of a premium for a permanent life insurance policy. They are often a key part of an executive compensation package and can provide a benefit to both the employer and employee.

Key Takeaways

A split-life insurance plan is a contract used to show how life insurance will be shared among beneficiaries.
Two types of split-life insurance plans include an economic benefit arrangement and a loan arrangement.
Typically split-dollar life insurance plans are created by an employer and employee.
A qualified attorney or tax advisor can help with creating a split-life plan's legal documents.
Split-dollar plans are terminated in two ways: at either the employee’s death or at a date included in the agreement.

In a split-dollar plan, an employer and employee execute a written agreement that outlines how they will share the premium cost, cash value, and death benefit of a life insurance policy. Split-dollar plans are frequently used by employers to provide supplemental benefits for executives and to help retain key employees.

The agreement lays out what the employee needs to accomplish, how long the plan will stay in effect, and how it will be terminated. It also includes provisions that restrict or end benefits if the employee leaves the job or fails to hit agreed-upon performance metrics.

Most split-dollar life insurance plans are used in business settings between an employer and employee (or corporation and shareholder). However, plans can also be set up between individuals (sometimes called private split-dollar) or between an individual and an irrevocable life insurance trust (ILIT).

Since split-dollar plans are not subject to Employee Retirement Income Security Act ( ERISA ) rules, there is more latitude in how agreements can be written. However, they must still adhere to specific tax and legal requirements.

Split-dollar plans also require record-keeping and annual tax reporting. Generally, the owner of the policy, with some exceptions, is also the owner for tax purposes. Premium payments made by the employer are considered taxable benefits paid to the executive. Limitations also exist on the usefulness of split-dollar plans depending on how the business is structured (for example as an S Corporation, C Corporation, etc.) and whether plan participants are also owners of the business.

Split-dollar plans have been around for years. In 2003, the IRS published new regulations which outlined two different acceptable split-dollar arrangements: economic benefit and loan. While some tax benefits were removed that year, split-dollar plans still offer advantages such as:

Use of corporate dollars to pay for personal life insurance : Plans can leverage the benefit, especially if the corporation is in a lower tax bracket than the employee is.
Low-interest rates : Low interest rates are available if the applicable federal rate (AFR) is below current market interest rates when the plan is implemented. Plans with loans can maintain the interest rate in effect when the plan was adopted, even if interest rates rise in the future.
Tax benefits : Options to help minimize gift and estate taxes.

Under the economic benefit arrangement, or economic benefit regime) the employer is the owner of the policy, pays the premium and endorses or assigns certain rights or benefits to the employee. The employee is allowed to designate beneficiaries who would receive a portion of the policy death benefit. The value of the economic benefit the employee receives is calculated each year.

The loan arrangement, or loan regime, is more complicated than the economic benefit plan. Under the loan arrangement, the employee is the owner of the policy and the employer pays the premium.

The employee gives an interest in the policy back to the employer through a collateral assignment. A collateral assignment places a restriction on the policy that limits what the employee can do without the employer’s consent. A typical collateral assignment would be for the employer to recover the loans made upon the employee’s death or at the termination of the agreement.

The premium payments by the employer are treated as a loan to the employee. Technically each year, the premium payment is treated as a separate loan. Loans can be structured as term or demand and must have an adequate interest rate based on the AFR.

The rate on a loan for a split-dollar insurance plan can be below current market interest rates. The interest rate on the loan varies, depending on how the arrangement is drafted and how long it will stay in force.

Split-dollar plans are terminated at either the employee’s death or a future date included in the agreement (often retirement).

At the premature death of the employee, depending on the arrangement, the employer recovers either the premiums paid, cash value, or the amount owed in loans. When the repayment is made, the employer releases any restrictions on the policy and the employee’s named beneficiaries, which can include an ILIT, receive the remainder as a tax-free death benefit.

If the employee fulfills the term and requirements of the agreement, all restrictions are released under the loan arrangement, or ownership of the policy is transferred to the employee under the economic benefit arrangement.

Depending on how the agreement was drafted, the employer may recover all or a portion of the premiums paid or cash value. The employee then would own the insurance policy. The value of the policy and premiums payed by the employer are taxed to the employee as compensation.

The owner of a split-dollar policy depends on the arrangement. Under a "loan" arrangement, the employee owns the policy and the employer pays the premium. Under an "economic benefit" arrangement, the employer owns the policy, pays the premium and endorses or assigns certain rights or benefits to the employee

A main benefit to a split-dollar plan is that the employer pays the premium. Other benefits include the fact that tax-free income is possible through loans and withdrawals, and cash values may grow on a tax-deferred basis. The benefit for the employer is that they can choose who gets the benefit. There are fewer restrictions than with traditional plans and plan costs may be lower.

The two types of split-dollar plans are economic benefit arrangements (economic benefit regimes) and loan arrangements (loan regimes).

Like many non-qualified plans , split-dollar arrangements can offer several benefits as a financial tool for employers looking to provide additional benefits to key employees. Employees can take advantage of an employer's assistance with the premium. Consider consulting an attorney or tax advisor when drawing up the documents.

Nationwide. " Endorsement Split Dollar Plan ."

Internal Revenue Service. " Split Dollar Life Insurance Audit Technique Guide (03–2005) ."

U.S. Department of the Treasury. " Treasury and IRS Issue Final Regulations for Split-Dollar Life Insurance Arrangements ."

Nationwide. " Split Dollar Plans ."

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How to handle the accounting for collateral assignment split-dollar life insurance plans.

By Marc Giampaola , Director, Assurance Services & Michael Parillo , Senior Manager, Managed Services & Consulting

Split-dollar life insurance is an arrangement between two parties to share the costs and benefits of a permanent insurance policy. Often these arrangements are between an employer (the “company”) and an employee (the “executive”), involving a whole life or indexed universal life (“IUL”) policy. Companies generally use the policies as a Supplemental Executive Retirement Plan (“SERP”), which are considered non-qualified benefit plans.

The two most common types of split-dollar life insurance arrangements are endorsement and collateral assignment, which are defined based on which party controls the policy. Within these agreements, there are multiple documents executed, most commonly:

Life insurance policy – Issued by the insurance company to the policy owner on the life of the insured.
Split-dollar agreement – Agreement between employer and employee providing details of the agreement.
Promissory note – A loan issued by the company to the employee for the cost of the policy.

Endorsement split-dollar life insurance is an employer-owned policy that endorses some or all of the death benefits to the employee’s beneficiary. The employer owns and controls the policy and, therefore, makes all policy decisions (i.e., surrender). A separate agreement is entered into between the employer and employee to define the split of costs and benefits between the two parties.

Collateral assignment split-dollar life insurance policies are owned by the employee with some benefits assigned to the employer. The employee owns and controls the policy while the employer makes the premium payments. Premiums are loans to the employee. Some level of interest on the amount borrowed must be paid. The employer is ultimately reimbursed for the premiums paid and related interest from the death benefit or the cash surrender proceeds.

There are different types of collateral assignment arrangements based on the structuring of the note within the agreement. They are as follows:

Non-recourse arrangements rely solely on the underlying insurance policy for all repayment of principal and interest to the employer. The employee, or the employee’s estate, is not responsible for funding any shortfall by the policy to return the premium and related interest; however, any shortfall could be taxable to the employee as forgiveness of debt income.
Limited recourse arrangements rely primarily on the underlying insurance policy for all repayment of principal and interest owed to the employer. However, if there is a shortfall, the employee or the employee’s estate may be called upon to make up the deficiency. These arrangements generally have terms requiring the employer to seek payment from the life insurance company first; the employee is secondarily liable.
Full-recourse arrangements are similar to limited-recourse arrangements, with the difference that the employer can seek repayment of the principal and interest from the employee directly if there is a shortfall, without first pursuing any recovery from the life insurer. The employee has substantially the same net liability for any shortfall but would have the burden of satisfying the shortfall and then pursuing recovery from the policy.
Providing cash to the insurance company and establishing a premium deposit account;
Establishing a deposit account at a bank or credit union under the employee’s name; or
Purchasing a single premium immediate annuity (SPIA).

The method of funding has no impact on the accounting, as there is a single loan made to the employee.

Most commonly, companies utilize collateral assignment split-dollar life insurance set up under non-recourse or limited-recourse arrangements. As such, the focus of the accounting section will be on these types of arrangements.

RELEVANT GUIDANCE

ASC 310: Receivables (“ASC 310”)
ASC 325: Investments – other (“ASC 325”)
Loans and investments, November 2020 Edition (“PwC Loans Guide”)

ACCOUNTING FOR SPLIT-DOLLAR ARRANGEMENTS

The accounting for split-dollar arrangements is generally the same regardless of the structure of the agreement. Additionally, whether the promissory note is non-recourse or limited-recourse has no effect on the journal entries recorded over the life of the arrangement.

Recording the Loan at Issuance

In executing the transaction, the employer provides funding for the premium payments of the life insurance policy in exchange for a promissory note from the employee. The transaction meets the definition of a loan as defined by ASC 310-10, which states:

A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.

Upon issuance of the loan, the employer provides cash through one of the funding methods described above and establishes a loan receivable from the executive. As an example, assume the defined loan amount is $3.0 million. The value of the loan is measured at issuance equal to the cash outlay by the Company. ASC 310-10-30-2 states:

As indicated in paragraph 835-30-25-4, when a note is received solely for cash and no other right or privilege is exchanged, it is presumed to have a present value at issuance measured by the cash proceeds exchanged.

In these arrangements, the company does not provide any other right or privilege. The promissory note is received in exchange for the cash needed to fund the premiums of the policy. As such, the value of the loan is equal to the cash paid.

The journal entry to record the example transaction is:

Dr: Officer Loan Receivable	$3,000,000
Cr: Cash	$3,000,000

Recording the Interest Accrual

Once the loan is established, it begins earning interest based on the note rate, typically the long-term Applicable Federal Rate for the month and year the agreement becomes effective. Interest compounds annually. In the example transaction, assume an annual interest rate of 2.50%. Each month the company earns interest on the outstanding loan balance, and a journal entry is recorded to accrue interest on the loan. Interest is paid from the death benefit and, therefore, increases the receivable from the executive in each accounting period. The entry below represents the monthly accrual of interest:

Dr: Officer Loan Receivable-Accrued Interest	$6,250
Cr: Interest Income	$6,250

(calculated as $3,000,000 loan * 2.5% interest / 12 months)

Recording the Settlement of the Loan

The loan is settled upon death or surrender of the policy. The company is entitled to the value of the original loan and accrued interest from inception. The cash owed to the company is paid from the death benefit or surrender value, with the remainder being paid to the employee (surrender) or the employee’s estate (death). Based on the example, assuming settlement and surrender of the insurance policy 24 months post entering into the policy (i.e., $150,000 interest earned), the entries to record the receipt of cash and settlement of the receivables are as follows:

Dr: Cash	$3,150,000
Cr: Officer Loan Receivable	$3,000,000
Cr: Officer Loan Receivable-Accrued Interest	$150,000

Other Considerations for Subsequent Measurement

Collectability.

At each period-end, the company needs to analyze the value of the outstanding loan for changes in the valuation. Generally, these loans are considered not held for sale and, therefore, are reported at outstanding principal adjusted for any charge-offs, allowance for loan losses, deferred fees, and unamortized premiums or discounts based on ASC 310-10-35-47, which states:

Loans and trade receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff shall be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses (or the allowance for doubtful accounts), any deferred fees or costs on originated loans, and any unamortized premiums or discounts on purchased loans.

Additionally, the company should analyze at each period-end any probable collection issues and the need for an allowance that would reduce the asset balance.

Value of the Loan

With an insurance policy securing the loan, further consideration is needed to determine the value of the loan. For endorsement arrangements, the employer owns the policy and, therefore, owns the surrender decision. The company values the loan at the lesser of the premiums paid or cash surrender value of the policy as of the period end date. This amount can generally be obtained from the statement provided by the insurance company.

For collateral assignment arrangements, the employee owns the policy, so the company does not control the surrender decision. However, the company does maintain the right to collect on the loan under the collateral assignment. Therefore, the company may need to consider the cash surrender value of the policy when determining the value of the loan. ASC 325-30-35-1 states:

An asset representing an investment in a life insurance contract shall be measured subsequently at the amount that could be realized under the insurance contract as of the date of the statement of financial position…

Depending on the type of note used in the agreement–non-recourse or limited-recourse– when determining the carrying value of the loan at each period-end.

Limited-Recourse

For limited-recourse, the loan is secured by the cash surrender value of the insurance policy, but the company also has the option to seek repayment from the employee if the cash surrender value is less than the outstanding loan amount. Since the loan is secured by both the policy and by the employee, the cash surrender value is not the only consideration when determining the value of the outstanding loan. As such, the value of the outstanding loan does not need to be adjusted if the cash surrender value is less than the outstanding loan, and there is no further consideration needed at period-end for these types of arrangements.

Non-recourse

For non-recourse notes, the loan is secured solely by the cash surrender value of the policy and, therefore, potential for a loss related to the loan exists if the cash surrender value is less than the loaned amount. The cash surrender value is the realizable amount of a life insurance contract at any given date. The accounting guidance does not allow a life insurance asset to exceed cash surrender value less an allowance for credit losses. The company is entitled to the premiums paid plus interest earned under these arrangements. The carrying value of the portion of the loan for which premiums were paid would need to consider the cash surrender value. This portion of the loan would be valued by the company as the lesser of the cash surrender value and the cumulative premiums paid by the reporting entity.

This is based on the premise that surrender is not within the control of the company and it is uncertain whether the company will be reimbursed for cumulative premiums paid upon death or surrender. Any premiums paid in excess of this amount should be recorded as an expense.

As an example, if the outstanding loan related to a non-recourse policy was $3,000,000 and the cash surrender value of the policy was $2,500,000, the company would need to reduce the carrying value of the loan to the cash surrender value and recognize a loss related to the loan. The entry below represents how the company would record the adjustment:

Dr: Loss – Officer Loan	$500,000
Cr: Officer Loan Receivable	$500,000

While the general accounting for these arrangements is similar, specific details and terms within all documents included in the agreement need to be evaluated when determining the appropriate accounting, and companies should consult their accountant with any questions. Additionally, there are potential individual income tax implications for the executive related to these arrangements that should be considered.

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Split-Dollar Versus 457(f) Plans and What Credit Unions Should Evaluate

When building an executive benefits package that seeks to recruit and retain top talent, the question arises: with multiple options, which benefits should we include? Popular choices that uniquely benefit credit unions are the collateral assignment split-dollar (CASD) and 457(f) plans. Both are retention tools that provide retirement benefits to executives—but which is better? As with most decisions, it depends.

To offer insight is returning podcast guest Mike Downey, senior managing director of Newcleus Credit Union Advisors. According to Mike, you may not necessarily need to choose one over the other, but there are key differences and advantages to each you should evaluate.

Significant differences between a split-dollar and 457(f) include the level of complexity, how long the plan is active, and how the benefit is funded or offset by the credit union.

For example, a split-dollar is a life insurance policy arrangement that only ends upon the executive’s death. A 457(f) offers shorter, incremental benefits to an executive and ends at its vesting period. Credit unions should first consider what they’re trying to achieve. Is it a retention tool that a long-term benefit such as the split-dollar can fulfill? Or is it a recruitment tactic that can provide shorter, incremental benefits to an executive with the promise of a protected payout sometime in the future, as with a defined benefit 457(f) plan?

When choosing a benefit, credit unions should also consider:

Is the executive insurable? A split-dollar is a life insurance policy, whereas a 457(f) may offer more flexibility.
What is the credit union’s asset size? Does your credit union have the capital to set aside 457(f) funds to grow its earnings and take on additional liability, or is a split-dollar a better fit?
What investment options will fund or offset a 457(f); what other investment options should you consider for for-profit entities, such as CUSOs?

Stream the full episode for more details about 457(f) plans, including:

How credit unions can turn 457(f) funds into a perpetual income pool and repurpose dollars for future succession and benefits planning.
Why your credit union may consider a defined-benefit 457(f) plan over a defined-contribution 457(f) plan.
Why a hybrid, diversified approach to split-dollars and 457(f) plans may not be as uncommon as you think.

Listen to learn more.

Audio Transcription

Doug (00:03):

Hello Credit Union executives. Welcome to “C.U. on the Show,” where we give you up-to-date information on how you can reduce risk, keep key talent, and take a strategic approach to your personal financial wellness hosted by me, Doug English, a Certified Financial Planner™ and former credit union insider with Act Advisors. Back as my guest today is Mike Downey, senior managing director at Newcleus Credit Union Advisors. Mike helps credit unions with retaining and rewarding key executives. Mike has been on my podcast before, where we took a deep dive into the risks of collateral assignment, split-dollar plans. Now, if you haven’t, give a listen to that episode.

Doug (00:50):

Today, we’re going to drill into the 457(f) form of a supplemental employee retirement plan. We have Mike Downey back to help us dig into the 457(f) plan design—what to look out for, what the risks are, what the choices are. So, Mike, thanks for joining us again for that.

Absolutely.

So talk to me about the 457(f). I’m used to seeing collateral assignment as the primary solution that credit unions have selected for executive retention and retirement income. So in the first place, why would I choose a 457(f) over a split dollar?

Mike (01:31):

Well, I think first, right off the bat, a split-dollar is a life insurance policy and not everybody’s insurable. Two years ago, I was uninsurable. You know why? Because I had a sleep study and I wasn’t using the C-PAP and I didn’t have a follow-up and they were like, so I had to go and now I wear this mask and now I’m insurable. So it’s not always those major things that may not make you insurable. You know what I mean? Just maybe a simple follow-up that we just haven’t done with the doctor or something. So where I’m going with that is not everybody’s insurable at one given time or the other.

Doug (02:09):

Understood. All right. So if you’re not insurable, 457(f) is another way to provide an executive benefit program. Are there other reasons for why I might go over collateral assignment ?

Mike (02:20):

Simplicity. It doesn’t have some of the complexity that comes with a loan regime split-dollar, especially if that loan regime has partial vesting or so forth, a 457(f) is pretty simplistic.

Doug (02:34):

What I’m used to seeing in 457(f) is it says here’s a value that you’re going to get at a particular point in time. And when that point of time is reached, that transaction is executed and the credit union’s done. Is that right?

Mike (02:51):

That’s correct. It’s just an IOU. And then there’s of course some of what ifs if they leave or are terminated for cause and so forth.

Doug (02:59):

So it is a lot simpler. So with the collateral assignment, that is a lifetime arrangement, the life of the executive, right?

Literally a lifetime, that’s correct, because that plan does not unwind or stop until the death of the executive where a 457(f) it ends at that vesting period.

Doug (03:21):

Does it make sense for a credit union with a new CEO they just recruited in to start out with an (f) plan and go to collateral assignment later, kind of seeing how the relationship develops or does that not make sense?

Mike (03:37):

I think it really, once again, step back and look at the situation. They look at all their options available to them at that particular time and not necessarily pick one over the other, but what are they trying to accomplish? Because it’s not uncommon to see a hybrid these days, having both plans, having some of the benefits coming from an F plan and some of the benefits coming from a loan regime split-dollar.

Doug (04:02):

All right. Talk to me more about that, when you see that kind of a combination, because I’ve only seen that a few times. When you’re going to put a 457F together with a collateral assignment. What does a normal combination look like?

Mike (04:15):

Yeah, so let’s take an executive 45 years old who will retire at age 65. The loan regime might be ideal to provide that benefit at age 65 because that’s more of a 20-year long-term horizon. But if the credit union wants to use a retention aspect to help that executive put their kids through school, college, or maybe even align with the business plan, make sure they’re there for five years or to align with some kind of succession plan of a CEO or another executive, and then you’re looking at what I call a shorter term or incremental type of benefit. That’s where the (f) plan really can work well because it’s simple. If you’re here five years, you get X number of dollars. And then that just coincides with that long-term plan, your long-term SERP as that loan regime split-dollar. So to put both plans together might be the best of both worlds because you’re able to efficiently provide the safe retention payout, and then still have that long-term commitment piece, which is the loan regime.

Doug (05:22):

So let’s talk about the plan design options if you’ve decided you’re going to have a 457(f) plan for some portion of your benefit package. Okay. Talk to me about the ways I might design the plan.

Mike (05:37):

Primarily we see two different types. One is a defined contribution, right? And that’s where credit unions say, Hey, you know what, we’re going to set aside a million dollars. And Doug, you get the earnings off of this million dollars as your benefits sometime in the future. That can be risky because let’s go back to 2007, 2008. What if your payoff, your benefit, your vesting, was at that time? You may have gotten no benefit because of a timing issue, of a market issue and so forth. So if it’s a defined contribution design, I would say that puts more risk on the executive getting a benefit. On the flip side, if you do a defined benefit where there’s a specified dollar amount that’s promised to the executive at some point of time, that really puts the risk then on the credit union to make sure they either offset that funding or have the funds available to pay that benefit.

Doug (06:33):

So the defined contribution verses the defined benefit, I clearly get the differences in the risks. Which is the more common structure that you see?

Mike (06:42):

I think because for those of us that were around in 2007, 2008, and even though that was what, gosh, we’re getting old, 14 some years ago, we still feel some of those effects when we’re designing. And I think we see primarily more the defined benefit plan.

Doug (6:57)

So the Credit Union has to deliver on their promise.

Mike (07:02):

What it does is it defines what the benefit is. So let’s say hypothetically that executive is getting recruited to go to another credit union. They know exactly what they’re giving up, where if you have this variable earnings only or defined contribution design and maybe up one week down the next there’s a lot of uncertainty. So I think the defined benefit provides certainty and can really help with that retention aspect

Doug (07:29):

Alright, so we’ve got these two choices: defined contribution or defined benefit depending on the outcome. Who’s going to carry the risk? Next step, what are the investment vehicles that we’re going to use for either one of those designs? And can you give us some examples in strengths and weaknesses of each?

Mike (07:48):

Absolutely. I think credit unions are an advantage as compared to let’s say the community banks, because a credit union can invest in equities, right? So the investment options for credit union, they can, they can offset that promise with mutual funds, ETFs, individual stocks, investment-grade corporate bonds. It could be some form of institutional life insurance, which is quite popular. You know, we call it QUOLI, credit union-owned life insurance. It can be some form of annuities to make that promise to pay and so forth. So credit unions are very fortunate because they have a lot of different investment options they can do to offset or to help fund that promise to pay. The key comes down to two things. One obviously is investment risk, safety of principal, volatility. But the second thing that’s really important is to look at the accounting treatment of those investments. If a credit Union is going to own an annuity, does that annuity have surrender charges? What does that mean from an accounting standpoint? It’s mark to market accounting. They gotta write down to the surrender value. So you put a million dollars in, you may only be booking 900 depending on the pricing and so forth. So accounting really comes into play, Doug, along with investment risks. I think accounting is very important because that could potentially impact their income statement too.

Doug (09:17):

You know, they’re not going to want to write that down. I would think they would seek to avoid having to write down that value, right?

Mike (09:23):

That’s why credit unions, being conservative by nature, sometimes tend to be more conservative, which lends to that life insurance type funding, the QUOLI and so forth, because of safety of principle, somewhat predictable returns and so forth, but it’s not uncommon. And in fact, there’s probably 8 billion of securities listed on call reports in the industry. So there’s a significant amount that still have equity type of exposure and so forth.

Doug (09:50):

And then I’ve seen some credit unions simply put the 457(f) on the balance sheet as a liability and never fund it. It’s just a liability of the credit union.

Mike: (10:01)

Doug (10:02)

Do you see that often?

Mike (10:03):

I do. ? But you know, if we look at current interest rates or yields on permissible investments, they’re traditional permissible investments. I mean, I’m looking at the tenure right now. It’s 1.35. You can put that in QUOLI and get two and a half net first year. So to pass up the opportunity to get higher yields on your investments, because NCUA does put a somewhat of a limit to how much they can do in these types of investments, but I think they’re missing out by not taking advantage of getting higher yields. And higher yields don’t always mean more risk, because some of those insurance-based products, you have the insurance carrier backing the promise, right? So you have safety of principle. You’ve got minimum guaranteed yields. So at the end of the day, they really have a gift, so to speak, from NCUA to invest for higher yields.

Doug (10:58):

And that’s that CUOLI solution. So my understanding that the credit union- owned life insurance as the investment chassis for the 457(f), is that the most common structure that you’re seeing?

Mike (11:13):

I still think it’s pretty, pretty split between that. And some form of like managed money, you know, like an equity type of diversified portfolio. I still think there’s a balance there. I don’t think one over the other from what we’re seeing.

Doug (11:28):

Vastly different risks, though. I mean, one is, one is a pretty low risk instrument dependent on interest rates, right? That’s the CUOLI. and the other is full-on equity market risk, right?

Mike (11:41)

Yeah,. But once again, I think, you know, as an advisor, you tend to make sure it’s allocated properly and diversified properly in a nice balanced type of portfolio. Rarely do I see a credit union have a hundred percent exposure without some kind of counter investment to mitigate that investment risk. Don’t put all your eggs in one basket, so to speak.

Doug (12:05):

I have heard that one before, for sure. So talk to me about if you have a defined benefit, you’ve got to deliver a certain value to the executive, and you’re the Credit Union.. What are you going to do to be able to manage the risk of providing that benefit? Do it just come out of your earnings, or how are you gonna handle that?

Mike (12:26):

I think the wise thing to do is match up the investment or some funding to offset that liability, and you fund it properly to meet that obligation. So, as an example if you promised, a defined benefit, you have to accrue that liability up to that point. It makes sense to have an asset to offset that liability. So upfront match that asset with that liability, and then manage and review and monitor that asset annually. If it’s equity-based at least quarterly to make sure that it is on track.

Doug (13:05):

All right, let’s talk about the excise tax in the 457(f). When are we going to run into the excise tax? How much is it, is there any way around it, what are the strategies for dealing with that?

Mike (13:19):

Yeah, so the excise tax is triggered when the 457(f) benefit is over a certain limit or total compensation of the executive exceeds $1 million. that excise tax is on the credit union. So even though the credit union will say , hey, we’re tax exempt, that does not avoid that excise tax. So a number of ways to mitigate that would be to have multiple vesting, different payouts and time it where it doesn’t go over those amounts. And it also makes sense to use other plans. Once again, I’m going to fall back on using multiple plans. So if you combine an F with the split-dollar plan, that can help minimize that if you keep that benefit under those amounts.

Doug (14:12):

So if you have a 457(f), does the funding vehicle change the excise tax?

Okay. So if you have a 457(f) and total comp exceeds a million dollars in any particular year, the credit union is going to owe 15% excise tax on the amount, over the million. Right?

Mike (14:30):

And based off of the benefit.

Doug (14:33):

Okay. So then that’s why you might choose to either time the total compensation. So that you don’t bump over a million, but if you’re a very large credit union, you’re probably there already, right? Your total comp for your senior executive is probably in the million range. I’m used to seeing that commonly. So you’re already paying it, right?.

Mike

Doug (14:54)

So then with the collateral assignment, you’re going that route that is not subject to the excise tax at all. Is that right?

Mike (15:05):

That’s correct. And I think that’s one of the attractive features of the loan regime, because going back to the F plan, one of the biggest downsides, we just talked about excise tax, but just regular taxation, because the taxation is based off of vesting, or I’m going to be technical here, when there’s no longer a risk of forfeiture. So basically vesting triggers taxation. So unlike, let’s say Doug, a 401(k) or an IRA where you’re paying tax upon receipt of the money, with the 457(f), you’re paying tax on the entire benefit on when there’s no longer a risk of forfeiture.

Doug (15:45):

Yup. So that can easily bump over the million dollar range. I’ve seen credit union CEOs that are in the 500,000 in annual comp range when they get the annual leave, sick leave, and the 457B and maybe a 457(f), and they kind of all pile onto each other. It’s not difficult to go over a million dollar income for a year or two.

Mike (16:09):

Yep. That’s correct. With the F plan, I would say the design itself can cause some risk, but if you’re really using the F plan for the, to use as r the retirement benefit, those are lump sums. Those are significant amounts as you were mentioning before. And once again, the reason for that is why is there a lump sum payout on an F plan, where if you’re paying tax on that benefit anyway, you might as well receive that payout, but you can structure it in a manner to have multiple payouts to try to mitigate that excise tax risk. And that’s once again, to diversify your plans, have multiple plans that can mitigate risk because honestly, there’s no one perfect plan out there. Maybe, hey, this is the ideal, but I think multiple plans can achieve that same target benefit, which then ultimately reduces risks.

Doug (17:14):

Given that large credit unions tend to have higher comp and a higher comp gets you at or near the excise tax. Anyways, the excise tax is 15%. So it’s pretty significant dollars. Would it be correct to assume that the mid-sized credit unions might have more activity in 457(f) because they don’t have the excise tax issues and the large credit unions might have more activity in collateral assignment, or is that not how the market is working?

Mike (17:47):

That’s a great question, Doug. I mean, if I look at it, I really don’t think the market is, is leaning toward that. But you make a very good point because the mid-size credit unions aren’t as concerned as that excise tax. I mean, an F plan could push them over that, but it’s not as a concern, because as you said, the larger credit unions are already dealing with that to begin with. But let’s take it a step further. What about the smaller credit unions? Because historically the smaller credit unions really felt they couldn’t have enough capital and take on the accrued liability to do an F-plan that would have any significance to the executives. That’s where loan regime split-dollar might be a better fit because it doesn’t take up all of that capital. And it’s not an accrued liability. It’s a performing asset. So you make a very good point. Does it? Does a plan really? Depending on the asset size of the credit union, I would say with the smaller credit unions, we’re seeing more and more of the loan regime split-dollar because of that capital constraint.

Doug (18:58):

What I’m hearing you say is that if you’re a smaller credit union with some constraints on your capital, and are looking to provide a retention or retirement supplement for your executive, the amount of dollars you’ve got to put in to provide a given level of benefit is likely to be less with the collateral assignment versus the 457(f). And are there more aspects to that to make it less taxing for that small credit union?

Mike (19:27):

Yeah, I mean, because I think you can structure the loan regime to have more favorable cash outlay and be more affordable for smaller credit unions. And that once again goes down into the plan design. We’ve seen some of the smaller credit unions provide a nice, significant benefit for their executives and you’re talking, the funding is no different than a car loan or a truck loan, but it can be designed that way where I think historically the mindset of the smaller credit unions say, hey, we can’t do any, we can’t afford to do anything. we can’t provide that. We just don’t have the scale and we’re just not there. That’s not necessarily the case if a split-dollar plan or a bonus plan or some kind of life insurance-based plan is structured properly because for an Fplan to really be efficient, we’ve seen large sums of money set aside. And the earnings off of that provide the benefit, right?

Doug: 20:00

That way the credit unions get their money back

Mike: 20:22

They get their money back and it comes down to opportunity cost of the money and so forth. But for the some of the smaller credit unions, they just can’t, they just don’t have that capital to do that.

Doug (20:34):

Very interesting. So the smaller credit unions may take a look at collateral assignment first and then get into the mid-sized category. You can kind of make a mix of the two depending on what your outcome is.

Mike (20:47):

Yeah. And then going back to your midsize comment, I mean, they might be in the best situation because they don’t have to be necessarily concerned with the excise tax if it’s structured properly and they can use multiple plans and not have to worry about that excise tax.

Doug (21:02):

All right. So we may have covered this already, but I’m going to just go back in one more time. Contrast for me as a credit union, the difference between just holding the 457(f) as a liability on the balance sheet versus funding. I think you said CUOLI was the most common funding choice. So contrast those two for me and how I would evaluate those choices.

Mike (21:26):

You’re going to have an accrued liability just plain and simple with an F plan.. It just comes down to how are you going to offset that liability. Okay? So you can either offset that liability with something conservative, like the CUOLI and we just match up that cash value with the, with the accrued liability. Or you can do it obviously with some other type of investment to do that, but either way from gap accounting, you’re accruing a liability because it’s an IOU a promise to pay.

Doug (22:00):

Yup. And then if I simply keep that, those assets in the credit union, I assume the primary difference is the earnings potential on those assets and the credit versus what they would be earning in an outside vehicle.

Mike (22:16):

That’s correct. And then, you know, we also have to take into consideration the what ifs. So what if the executive dies? What does that mean? What do they get? Do they get the accrued amount? If you use CUOLI that could really help because then you have cost recovery to the credit union. You’re able to provide that benefit to the estate of the executive. So the funding could come into play based off of some of those what if scenarios. What’s nice about the 457(f) asset is pretty simple; if the executive leaves, then that accrued liability reverses., that was income now. And they use those same funds for the next exit, you know, it could be perpetual where I think one of the downsides to the loan regime, that capital is tied up indefinitely.

Doug (23:03):

It’s a long, long, long term plan.

Mike (23:05):

It’s a long, its very long term. So with the 457(f) you can actually repurpose, so to speak, some of those dollars for the next person. So you have a perpetual pool of money, of capital that is used for succession planning and benefits. So there is more flexibility, I should say, with the 457(f). So yes, taxes, ooh you know that’s a bad word, but you have more flexibility with the 457(f).

Doug (23:31):

And then certainly is much simpler, much shorter, Mike, if you’re a large credit union, and you’ve got a for-profit entity, but you won’t do so. Talk to me about who should be the contractor with the executive and how to evaluate one entity versus the other. What are the choices? What are the thought patterns there?

Mike (23:54):

Yeah, that’s a great question. We were asked this quite frequently. That’s a great question. And it comes down to how is that executive, what entity is paying that executive and that’s key to an employee and that employee is getting their paychecks from the for-profit. Then we can design a plan for that for-profit. And because it’s a for-profit, it does open up the plan options for those executives meaning no need to do a 457(f), a traditional SERP that reduces that tax obligation. They know that tax liability, but, Doug, it does come down to they need to be getting their paycheck from that particular entity.

Doug (24:42):

Interesting. Okay. Well, I know that I’m starting to see some of that activity with some of the executives, having their paycheck come from the for-profit entity. And so what I think I’m hearing you say is if they had that as a choice that would give them more ability to choose their funding vehicle. Is that right?

Mike (25:03):

Yeah, because you can do some vesting without taxation. So we designed things in the for-profit world a lot different than we do on the non-profit. So you could have someone a hundred percent vested and only paying tax when they received the benefits sometime in the future. So we can truly do what I call true non-qualified deferred comp in a for-profit area.

Doug (25:27):

Interesting. The bankers are always targeting the credit unions’ taxation, or lack of taxation. But what I’m hearing you say is actually being a taxable entity could be an advantage.

Mike (25:40):

It can be , but the community bankers are at a huge disadvantage because they cannot do loan regime split-dollar; it’s a huge advantage for credit unions trying to recruit and retain talent. We see a lot of crossover from community banks over to credit unions, you know, and credit unions have a huge advantage in offering that particular benefit.

Doug (26:03):

Very good. Awesome, Mike. Thanks again.

Mike (26:04):

Anytime, always enjoy talking with you, Doug.

Doug (26:10):

That’s all the insider credit union knowledge we have for this episode. Are you enjoying the conversation? Be sure to subscribe and share your thoughts with other credit union leaders by leaving us a review. See you next time on “C.U. on the Show.”

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Life Insurance

Split-Dollar Life Insurance

Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.

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When a company makes a job offer, it often discusses life insurance options as part of the benefits package. And when it's a high-value employee, the options available often include split-dollar life insurance. Here, we'll tell you what split-dollar life insurance is, how it works, and how it benefits both employer and employee.

What is split-dollar life insurance?

Split-dollar life insurance policies are designed to recruit and retain high-value employees. There are two primary types of split-dollar life insurance agreements. Here, we'll tell you how this type of policy works and how each party benefits from the arrangement.

How does a split-dollar life insurance policy work?

Split-dollar life insurance is not a type of policy. Rather, it's an agreement between an employer and an individual. Here's how it works:

A company searches for a high-level employee.
Potential candidates want to know that if they die, their beneficiaries will have all the money they need.
The company chooses a candidate and makes a job offer. As part of the compensation package, they provide split-dollar life insurance.
It's a win-win situation. The company gets the high-level employee they want, and the new employee gets life insurance protection for their family.
The company purchases a permanent life insurance policy. That means that the policy will last the employee's entire life, as long as premiums remain up to date.

Who owns a split-dollar life insurance policy?

At first glance, split-dollar life insurance may seem confusing, but it's really not. There's only one thing to remember: Split-dollar life represents an agreement between two parties, and every detail stems from that agreement.

For example, which party owns a split-dollar life insurance policy depends on the type of agreement that was made.

Economic benefit and endorsement agreement

With an economic benefit arrangement, the employer owns the policy and pays the premiums. However, the employer allows the employee to choose the life insurance beneficiaries . If the employee dies, the employer ensures that beneficiaries receive a portion of the policy's face value.

Although the employee does not own the policy, they are responsible for paying income taxes on the benefit received. Depending on how the agreement is written, when the employee leaves the company, the policy may be transferred to them, or they can purchase it.

Collateral assignment and loan regime

When an agreement calls for collateral assignment, the employee owns the policy. The employer treats the funds they pay toward premiums as a loan to the employee. If the employee leaves, the loan may be forgiven or the employee may be expected to repay the money, depending on how the agreement was written. What happens to any cash value that has built up also depends on the initial agreement.

While the employee is taxed on the interest-free portion of the loan, the employer receives a tax deduction.

What are the benefits of a split-dollar plan?

When a company offers its employees term life insurance , it's pretty cut and dried. It purchases a policy for a specific amount and pays the premiums. With a split-dollar plan, the company not only purchases a permanent life policy, but it also tailors an agreement with the employee that will benefit all parties involved. And the benefits associated with a split-dollar plan can be plentiful.

For employees

Split-dollar life insurance is a nice perk for employees. Here are some of the reasons why:

It provides a higher death benefit for beneficiaries than might otherwise be affordable.
The employee may not have to pay anything toward a valuable life insurance policy. If they do contribute to premiums, it's typically only a portion.
Depending on how the agreement is written, an employee may be able to take the life insurance policy with them when they leave.
The employee is eligible to receive tax-free income through withdrawals and loans.

For employers

Employers understand that they must compete for top-notch talent. Including split-dollar life insurance in a compensation package benefits the employer in five ways:

It helps an employer recruit and retain top talent.
It allows a company to provide a valuable benefit while taking an income tax deduction.
There are fewer limits and rules on split-dollar life insurance plans than with traditional qualified plans.
Split-dollar plans come with lower administrative costs than traditional employee-sponsored life insurance plans.
It allows the company to recoup its investment.

How does split-dollar life insurance work for estate planning?

While split-dollar life insurance has historically been an agreement between an employer and employee, it can also be used for estate planning. An intergenerational split-dollar plan involves an irrevocable life insurance trust (ILIT) "owning" a life insurance policy on a specific member of a family. Premiums are (at least partially) paid by the trust, and proceeds are divided based on how the agreement is written.

Using a split-dollar insurance policy as part of estate planning is intended to reduce the amount of estate taxes due following the death of the insured.

Terminating a split-dollar plan

How a split-dollar insurance plan is terminated depends on how the original agreement is written. Typically, it ends when an employee dies, retires, or leaves the company. As long as it's part of the original agreement, the employee may be able to take their permanent life insurance plan with them. For someone who prefers permanent life to term life insurance, split-dollar life insurance is a valuable perk.

The employer pays the premiums for both types of plans: Economic benefit arrangement and collateral assignment. The difference is, when the two parties agree on a collateral assignment plan, the employer treats the premiums paid toward the policy as a loan to the employee.

Because the employer either pays the premiums directly or through a loan arrangement with the employee, the employee receives an economic benefit. The value of that benefit is taxed as income.

Yes, a split-dollar life insurance arrangement is a fringe benefit, typically offered to high-value employees. While it's designed to attract top-notch employees, a split-dollar life insurance policy also benefits the company in the event of the employee's death.

A reverse split-dollar policy is owned by the employee, but the employer pays the costs. Typically, the company names itself as the beneficiary, and the two parties agree that the company will receive a specific amount of money if the employee dies. The employee names their own beneficiary who receives what's left of the death benefit once the company claims their portion.

The two basic types of split-dollar plans are: An economic benefit split-dollar arrangement, in which the employer owns the policy, and a collateral split-dollar assignment, in which the employee owns the policy.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

More From Forbes

How split-dollar life insurance can benefit employees and employers.

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Joseph Milano, CLU, CHFC, CLTC, is a Managing Partner at New South Wealth Management .

It is not often a business can offer its employees a benefit that in the long run costs little or nothing. Split-dollar life insurance is a clever way to allow management to provide a key worker something of value knowing one day the company can recoup the costs. Sounds too good to be true? It isn’t. This strategic arrangement can benefit both employee and employer.

What Is Split-Dollar Life Insurance?

The name is a little misleading. Split-dollar life insurance is not a policy, but rather an agreement between an employer and employee. A contract sets out the obligations and benefits of both parties as they pertain to a cash-value life insurance policy. The main issues addressed are who owns the policy, how much of the premium costs are paid by the employer (maybe all), and how the cash value and death benefit will be shared regardless when the employee dies.

Cash-value life insurance is a policy where the premiums remain constant, and the policy never expires provided the insurer receives timely payments. A portion of the premiums is set aside giving the policy a “cash value” from which the insured can draw or borrow. These policies are normally five to 15 times more expensive than term policies that have no cash value and eventually expire.

There are two main types of split-dollar life insurance contracts:

• Endorsement method: The employer owns and controls the permanent insurance policy, and it is written in the contract that the employee can name a beneficiary for a share of the death benefit. A clause is included for an exit strategy known as a “roll out” (i.e., how the contract will end at the employee’s retirement).

• Collateral assignment method: The employee owns and controls the permanent insurance policy. In this arrangement, it is spelled out that in the event of death, the employee assigns a portion of the cash value and/or death benefit to the employer. Like the endorsement method, the employer pays most or all the premiums until retirement. However, since the policy is owned by the employee, the employer’s portion of the premium payments is treated as a loan. Since the employee owns the policy, he/she is free to do what he/she wishes at retirement after settling any cash value interest belonging to the employer.

Splitting Brings Togetherness

Cash-value life insurance is relatively expensive, and many employees will not buy it because of the cost. Would an employee take a policy if the employer paid a large portion or all the premiums? In my experience, the answer is usually yes. Offering such a benefit can build morale, help retain employees and even be used to attract new workers. The beauty of using cash-value insurance is the employer retains an interest in the policy, so it can tap into both the cash value and death benefit, up to the premiums paid. The employee benefits because they receive a policy that otherwise may have been cost prohibitive. The employer enjoys the ability to provide a benefit knowing that one day it will recover the cost.

Structuring A Split-Dollar Life Insurance Benefit

There is no hard-and-fast rule on how a plan like this is executed. One of the beauties of these arrangements is they are customizable based on the circumstances. The employer first needs to look at the goal of such a plan. Is the sole purpose to retain an employee? Maybe the employer wants to pay the full premium to deter an employee from leaving; an exit could be costly in losing a good policy or having to take on high payments. If the employer just wants to offer life insurance protection as part of a benefits package, then it’s possible that the employee would pay a portion of the premium. Here, the employee gets a good policy that otherwise may have been unaffordable.

The split-dollar agreement normally ends at retirement, and it is then that the employer recovers the premiums paid from the policy’s cash value. If the employee owns the policy, he/she could elect to continue the policy by taking future premiums. If the employer owns the policy, the employer could take its share of the cash value portion or “bonus” it to the employee. The employer could also keep the policy in place and collect a tax-free benefit when the retired employee dies.

Protecting Against The Loss Of A Key Employee

Many companies would suffer a financial loss if their key employees died. Finding a skilled replacement, training someone new and the loss of productivity are all costs that can be associated with losing certain key people. Some losses can be so great it is prudent to protect against them. If a company can quantify what the losses would be, those predicted costs could be built into a split-dollar life insurance contract. If the employee dies before retirement, the employer will recover those losses and the premiums paid, while the balance of any cash value and death benefit would go to the employee’s beneficiary.

There is an incentive for an employee to stay, knowing that he/she will one day have access to borrow from, annuitize or use as a tax diversified retirement supplement.

A Note Of Caution

Equity split-dollar may become more expensive in a rising interest rate environment, as the applicable interest rate is subject to change annually in many split-dollar plan designs. If your business gives up any rights to the cash value to which it was entitled under the split-dollar agreement, or if it bonuses the policy to the employee, the employee will be taxed on this benefit as additional compensation.

There are other ways to end the split-dollar relationship. For instance, the employer could release its right without receiving anything in return from either the employee or the policy. The value of the interest released by the employer is treated as additional compensation to the employee and, as such, is deductible by the business.

Tax Implications

In 2003, the IRS tightened regulations relating to split-dollar life insurance agreements. Policy ownership is critical in determining if employer-premium payments are classified as a nondeductible expense or a loan to the employee. There are moving parts contained within this type of agreement, which is why both a lawyer and a CPA need to be involved in its execution.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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The Big Picture of Split-Dollar Agreements

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Two strategies for strengthening executive compensation while staying flexible enough to accommodate your leadership continuity plan

Split-dollar life insurance is becoming a more popular executive benefit for credit unions. When executing these agreements, it’s important to consider the big picture by answering these questions:

How will this split-dollar agreement fit into our overall leadership succession plan? Specifically, will it allow us to recruit, reward, and/or retain other executives in the near future?
Will we have room under the National Credit Union Association’s regulatory cap on any non-703 investments?

According to NCUA 5300 data, assets for the most common split-dollar arrangement used in credit unions—“loan regime” or “collateral assignment split-dollar” life insurance—increased 120% percent from year-end 2015 through 2018.

A likely reason for this growth is that CASDs can help you retain top execs by providing them extra retirement income, income-tax free, while you add an asset (a loan to the executive for the life insurance premiums) instead of an expense to your books.

Under a typical CASD agreement, your loan is repaid with interest when the life insurance death benefit is paid out. As such, these are generally designed as long-term agreements, and you need to keep their long-term consequences in mind. Do this by following these two strategies:

1. Pay Attention To The Regulatory Cap For Otherwise-Impermissible Investments

Life insurance generally isn’t an allowable investment for credit unions under the Code of Federal Regulations, Part 703 . But NCUA does allow life insurance to be used as a funding source for certain credit union programs, including executive/employee benefits and charitable donation accounts.

Certain bonds and securities fall into that same category. That is, despite not complying with Part 703, they can be used in some cases to fund executive/employee benefits and CDAs.

However, when investing in life insurance or any of these other instruments that otherwise wouldn’t be allowed by Part 703, remember that NCUA limits the total value of these non-Part 703 investments to 25% of your total assets. For CASDs, the amount of the loan the credit union gives the executive to pay the life policy premiums counts toward that 25%.

Most state regulations follow NCUA guidelines. So, if a CASD pushes your credit union over this 25% limit—or is in danger of doing so within a few years—you’re likely to get very close attention from the NCUA and/or state regulators.

NCUA also specifies that no more than 15% of your total assets should be invested with any single non-government obligor. In the case of a CASD, the obligor isn’t necessarily the split-dollar agreement vendor, it’s the carrier for the underlying life insurance policy.

This is why, if you will have more than one CASD in force, or if that may be the case in the future, you may need to have different options for insurance carriers—which brings us to the next big-picture strategy for CASDs.

2. Create Benefit Packages You Can Adjust As Needed

When negotiating a CASD agreement, consider your credit union’s overall leadership continuity situation.

For example, a single CASD that pushes you too close to the 25%/15% limitations mentioned above could make it more difficult for you to retain other high-performing executives. Instead of one large CASD, your credit union would gain more flexibility via some combination of 457(b) and 457(f) plans and a smaller CASD.

The 457(b) option doesn’t add to your non-703 investment total. And with 457(f) plans, you can use non-703 investments, such as corporate-owned life insurance—but if you’re too close to the NCUA’s limits, you can also fund it as an operating expense.

The 457 plan options also give you the flexibility to offer shorter-term rewards that will help you retain executives in your C-suite pipeline. A 457(f) plan, for example, can be designed to pay out at specific intervals. You could offer a younger executive three payouts that come four years apart, timed to coincide with such life events as kids going to college or paying off a home.

Communicate your leadership succession outlook with prospective CASD providers to make sure you’ll be able to adjust your benefits and product mix if/when you need to.

The CASD provider should be able to show you financial models that project how multiple options are likely to grow over time, given various market conditions. The model should also include your credit union’s projected net worth under the same conditions, so you can manage the 25%/15% limits.

Ongoing Oversight Is Critical

Especially if you are using multiple vendors for CASDs, 457 plans, etc., your leadership team and board will need to closely track these investments.

It’s prudent to review CASD and other executive benefit product performance quarterly and to do a deep dive with your provider(s) at least once a year. Review whether your executive team’s situation has changed over the past year, and whether your recruitment and/or retention needs have changed accordingly.

By taking this big-picture approach to CASDs and other executive benefits tools, you’re investing in the long-term leadership your credit union needs to succeed.

Andy Roquet is an executive benefits specialist for CUESolutions platinum provider CUNA Mutual Group , Madison, Wis. For more information about split-dollar agreements and other supplemental executive compensation, read the CUNA Mutual/CUES ebook, Using The Online NCUA Examiner’s Guide To Manage Employee/Executive Benefits Funding . To learn more about becoming a CUESolutions provider, email Kari Sweeney .

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arrangement terminates and use the policy's cash values and death proceeds to informally fund a

nonqualified deferred compensation arrangement.

The endorsement method also is generally easy to implement and administer because the business is

primarily responsible for all aspects of the policy management. A business can more easily convert an

existing business-owned policy to a split-dollar arrangement by simply endorsing the death benefit to the

insured, rather than by transferring ownership of the contract.

Further, in some cases, a business may wish to avoid the appearance of a loan or debt transaction with

the insured because of applicable securities laws or existing lending agreements that restrict corporate

loans to employees, such as the Sarbanes-Oxley Act of 2002 for public corporations (SOX).

situations, a business may prefer the endorsement method, since the associated documentation looks

less like a loan than the collateral assignment method.

Collateral Assignment.

The collateral assignment method is generally employed when the insured 1)

desires control over the policy and/or rights to the policy’s equity (see discussion of policy equity at

Question B.10

), 2) already owns the policy or has a trust that owns the policy, and/or 3) will retain the

policy, either directly or through his or her trust, upon termination of the arrangement. The collateral

assignment method also can complement the insured’s estate tax planning, since the insured’s ILIT can

directly apply for the policy and enter into the arrangement with the business. This keeps the policy death

benefits out of the insured’s estate and away from both the insured’s and business’ creditors, which may

not be possible when the business owns the life insurance.

Prior to issuance of the final regulations, the collateral assignment method was the structure of choice for

many grandfathered split-dollar arrangements. That structure provided the insured with control over the

policy and attempted to provide income tax-free access to the policy’s equity, which was expected to

increase over time. Post-final split-dollar arrangements structured and taxed as loan arrangements

generally will be documented as collateral assignment arrangements (see discussion at

Question D.8

Who Pays the Policy Premiums Under a Split-dollar Arrangement?

With regard to premiums, split-dollar arrangements are either structured as 1) non-contributory plans,

where the business pays all premiums, or 2) contributory plans, where the premiums are split between

the business and insured.

As discussed in

Questions C.14

, prior to the issuance of the final regulations, contributory

plans not only allowed the insured to offset any imputed taxable income by an amount equal to the

contribution made by the insured (or by the insured’s ILIT), but also, according to many, provided the

insured (or his or her ILIT) with an income tax basis in the policy. Further, such contributions were

income-tax-neutral with regard to the business. The final regulations, however, changed the tax benefits

associated with contributory plans, significantly impacting their use in structuring premium splits. Thus,

while certain contributory plans will no longer make sense for new arrangements, they may still be found

in certain grandfathered split-dollar arrangements.

What Is a Non-contributory Plan?

Under non-contributory plans (also called “employer-pay-all” plans), the split-dollar agreement requires

the business to pay each premium on a policy, in full, for the duration of the arrangement, without any

Federal and state securities laws can impact split-dollar arrangements involving publicly traded companies, with potentially

serious consequences. In particular, a split-dollar arrangement resembling a loan transaction may cause issues under SOX due to

its prohibition on personal loans to directors and covered executives. See

Question E.16

for a more extensive discussion of the

impact of SOX on split-dollar arrangements. Note that although SOX does not technically apply to nonprofit organizations, many of

these organizations have voluntarily adopted certain SOX-like provisions, including prohibitions on personal loans to directors and

executives. If working with a nonprofit, be sure to review the organization’s policies and whether a split-dollar arrangement with an

organization’s director or executive would be in compliance.

Splitting the Difference: Why Careful Structuring and Regular Monitoring of a Split-Dollar Life Insurance Plan Might Benefit Employers and Employees

At a glance.

For an employer, split-dollar life insurance plans can be a useful way to attract and retain key hires.
For employees, split-dollar plans can be a valuable estate-planning vehicle for employees wishing to negotiate additional fringe benefits from their employers.
Understanding of the various types of split-dollar plans, discussing the advantages and disadvantages and any restrictions with an attorney, and monitoring and reviewing the plan and potential benefits are important steps for both employers and employees.

Split-dollar life insurance can serve a multitude of uses. In times of a tight and competitive hiring market, employers may consider split-dollar life insurance as one of many diverse strategies to attract and retain desired employees. These plans are best established for key employees as a fringe benefit, but other uses include private split-dollar setup between individuals, an individual and a trust, or two trusts. This intergenerational split-dollar can supplement a well-designed estate plan.

This article will focus on split-dollar as an employment incentive – though the fundamental concepts apply across the board. In the compensation setting, a business may pay life insurance premiums for a policy on the employee’s life. This split-dollar plan may not only accomplish an employee’s wealth-transfer goals, but also may establish a business’s replacement fund for a valuable employee. These split-dollar arrangements can vary depending on the interests of the employer and employee, and both employers and employees should consider educating themselves on the various structures, benefits and considerations as part of their employment negotiations and wealth-transfer planning.

Types of Split-Dollar Plans

Split-dollar plans are typically structured as an economic benefit arrangement with an endorsement or as a loan arrangement with a collateral assignment. In some cases, a non-equity collateral assignment (NECA) or a switch-dollar strategy might be used.

Economic Benefit With an Endorsement : Under an economic benefit/endorsement split-dollar plan, the employer is the policy owner and the employer-owner shares the death benefit with the employee-participant. Under this plan, a business allows the employee-participant to name a beneficiary on all or a portion of the policy by filing a supplemental form (the “endorsement”) with the life insurance carrier, naming their desired beneficiaries of the portion of the death benefit. The employer-owner pays the policy premium annually, and the employee-participant includes the “economic benefit” of the endorsed death benefit as taxable income. If the employee-participant dies while the endorsement split-dollar plan is still in effect, the designated beneficiaries receive the endorsed portion of the death benefits (most often the full amount) with the employer-owner receiving the remaining portion. If the endorsement split-dollar plan is terminated, the employer-owner can keep the life insurance policy and remove the endorsement, or they can transfer the policy to the employee-participant. There is no cost to the employee-participant unless the policy is transferred to them. This endorsement split-dollar plan is most often used to provide a low-cost death benefit to the employee-participant as a fringe benefit or where the employer wishes to own the policy and/or obtain key person protection.

The economic benefit cost is calculated based upon the employee-participant’s age, the death benefit and the risk factor provided in the Table 2001 published by the Internal Revenue Service (IRS). This economic benefit increases each year as the employee-participant ages, so many employee-participants might benefit from reviewing these plans and their costs and then deciding whether to terminate the split-dollar plan or change to another type of arrangement. Some employee-participants may also try to lower the economic benefit rates by making the endorsement split-dollar plan with a survivorship policy.

Loan Regime With a Collateral Assignment: In a loan regime split-dollar plan, the employee-participant owns the policy, and the employer pays the premiums. Each premium payment is treated as a loan from the employer to the participant (or trust, as the case may be), and the employee-participant provides the employer with an interest in the policy through a collateral assignment. The employee-participant must pay interest on the loan each year, either out-of-pocket or as accrued or imputed income; if imputed income, the employee-participant may owe income tax on this interest. The collateral assignment is filed with the insurance carrier, protecting the employer’s interest in the policy until the employer is repaid. Until the employer is repaid, the employee-participant can only access the cash value of the policy in excess of the loan balance (the “equity”), and, upon the employee-participant’s death, the death benefits either repay the loan to the employer or the employer forgives all or a portion of the debt. Similarly, if the plan is terminated, the employee-participant must repay the loan using the policy’s cash value or other funds, unless the employer forgives the loan. The loan regime plan allows the employee-participant to own the policy, but also to provide access to the policy’s cash value.

The collateral assignment balances benefits to the employer with benefits to the employee. From the employer’s perspective, in addition to providing a nice fringe benefit to attract and retain employees, the employer can selectively provide the benefit to employees and its premium costs can be recovered through the death benefit. From the employee’s perspective, the employee owns the life insurance, receives a tax-exempt death benefit (when properly structured) and, depending upon the structure of the insurance, can access some of the cash build-up.

Non-Equity Collateral Assignment: One “hybrid” structure is the non-equity collateral assignment split-dollar plan. In this structure, the life insurance policy is owned by the employee-participant, and the employer pays the premiums with expectations of repayment in the future. In this case, the employee-participant agrees to repay the employer the greater of the policy’s cash value or cumulative premiums paid when the plan terminates. Like the endorsement split-dollar plan, the employee-participant pays income tax each year on the death benefit cost associated with the death benefit they are entitled to receive.

If the employee-participant dies while the plan is still intact, the employer will receive the greater of its premiums paid or the policy’s cash value from the death benefit, and the employee-participant’s designated beneficiaries will receive the remainder. If the plan terminates prior to the employee-participant’s death, the employer is repaid the greater of the cash value or premiums paid, or the employer can forgive this debt in whole or in part; any forgiveness may be income taxable to the employee-participant. This NECA split-dollar plan may be beneficial where the employee-participant wants to own the policy, the death benefits are important for the employee-participant’s wealth transfer goals, and the employee-participant needs help paying the premiums. Employers and employees may consider reviewing these plans to determine if, and when, the policy cash value exceeds the total premiums paid. The parties may then determine if changes, such as switching to a loan regime plan, might be desirable.

Switch-Dollar Plan : A switch-dollar plan starts as an NECA split-dollar plan, and, at a future date, may switch to a loan regime split-dollar plan. Many survivorship policies switch at the death of the first of the insured to die whereas, for a single-life policy, the switch occurs just before the policy’s cash value exceeds the premiums paid, or when the economic benefit cost exceeds the loan interest costs. At the time of the switch, the loan amount will equal the outstanding repayment obligation under the NECA split-dollar plan, which is the greater of the premiums paid by the employer or the cash value of the policy; the future premiums paid will be considered a loan by the employer. Upon the employee-participant’s death, the split-dollar loan is repaid to the employer from the death benefits (with the remaining benefits paid to the designated beneficiaries), or, if the plan is terminated, the loan is paid from a combination of the policy cash value and the employee-participant’s other assets. As with a loan regime split-dollar plan discussed above, the employer may also forgive all or a portion of the loan.

This switch split-dollar plan is often used for survivorship policies because of the increased costs at the death of the insured, or, for single-life policies, to decrease the income taxes owed. Reviewing when to affect this switch is an important part of monitoring these policies, and may be a valuable consideration for the employer and employee.

Other Considerations

In addition to researching these split-dollar plan options, employers and employees should consider the income and estate tax implications of these plans. For example, if employers own the life insurance policies under the endorsement or NECA split-dollar plans, both parties should ensure that the certain requirements are met to keep the tax-exempt death benefit for the designated beneficiaries. The employee-participant may also consider discussing the proposed split-dollar plan with their estate planning attorney to determine if an irrevocable life insurance trust might purchase the policy, or if the split-dollar plan has other unintended gift and estate tax consequences or liquidity issues. Employers and employees might be limited from using the loan regime or switch split-dollar plans because of the Sarbanes-Oxley Act and its prohibition against personal loans to directors and executive officers of publicly traded companies. Other types of life insurance policies may also not be appropriate for loan split-dollar plans because of other federal laws.

Split-dollar plans can be a useful way to attract and retain executives or key persons for an employer, and they can be a valuable estate planning vehicle for employees wishing to negotiate additional fringe benefits from their employers. Understanding the various types of split-dollar plans, discussing the advantages and disadvantages and any restrictions with an attorney, and monitoring and reviewing the plan are important steps for both employers and employees.

Finally, while the focus of the above has been on the employer-employee use of split-dollar, the same concepts apply in a pure estate planning context. For example, for intergenerational split-dollar plans, a dynasty trust and a non-dynasty trust might enter into a similar arrangement. The value and appropriate structure in those cases is very fact-specific, but the above concepts apply.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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Split-Dollar Insurance: Life Insurance for Executives

If you're looking for a unique benefit solution that will provide your financial institution's key executives with life insurance and supplemental retirement benefits, split-dollar life insurance fits the bill perfectly.

What is Split-Dollar Life Insurance?

Split-dollar life insurance is a method that a financial institution can use to provide a life insurance policy—and the associated cash values that go with it—to a key executive. The cash value element of the life insurance policy can provide supplemental retirement income for the key executive. The death benefits of the life insurance policy can provide a benefit for the executive’s family (beneficiary) in the event of the executive’s premature death. Also, the financial institution receives a death benefit to recover the premiums paid for the life insurance policy. The plan can be designed to provide the financial institution with a recovery of the cost of funds used in allocating assets to this very important executive benefit plan.

Split-dollar life insurance can be designed in two ways:

1. The endorsement method (economic benefit regime)

2. The loan regimen method (better known as collateral assignment split dollar or CASD)

Differences Between Plan Arrangements

Endorsement (economic benefit) method

In the endorsement method, the life insurance policy is owned by the financial institution, with the key executive listed as the insured. The beneficiary is typically split between the institution and the key executive’s named beneficiary. The institution pays the premium.

The institution endorses part of the cash value (the policy cash value in excess of the institution's premium contributions to the policy) to the executive. The policy death benefit is also split, with the institution retaining enough death benefit to recover its cumulative premiums paid into the policy and the remaining death benefit going to the key executive’s beneficiary. In some cases, the institution may retain death benefit coverage as key person life insurance on the executive in order to help the institution gather money to help replace the executive in case of premature death.

The key executive must pay income tax annually on the economic value of the executive's death benefits portion of the life insurance protection. The value of the executive’s portion of the death benefit is determined by using IRS table 2001.

When endorsement method split-dollar life insurance is intended to provide a supplemental retirement income for a key executive, the plan takes on some unique characteristics. If the plan is owned by a non-profit business and provides a retirement benefit (economic benefit) to the key executive, the plan becomes subject to IRS code sections 457(f) and 409(A).

Code section 457(f) has certain aspects that make the plan less favorable than the collateral assignment split-dollar arrangement. The plan is subject to a substantial risk of forfeiture. As long as the executive isn’t entitled to a cash benefit (retirement benefit) or the executive doesn’t vest in the plan, there is no current income taxation (deferred income taxation) until there is no longer a substantial risk of forfeiture.

Collateral assignment split-dollar life insurance arrangement (CASD)

In the collateral assignment split-dollar arrangement, the key executive is the owner and insured of the life insurance policy. The financial institution pays the premiums on the policy by making a loan to the executive for the annual premium. This is booked as a long-term asset on the institution's balance sheet. The beneficiary of the policy is split between the institution (to recover the outstanding loan) and the executive’s beneficiary. The executive executes a collateral assignment of the life insurance policy to the institution as collateral for the premium loans.

In the CASD arrangement, the loan from the institution to the key executive is usually an interest-free loan. When the loan is structured this way, it is a below-market loan subject to IRS code 7872. Code section 7872 states that the interest on the loan will be imputed to determine the interest that should have been paid on the loan. This is referred to as the "applicable federal rate" (AFR). This imputed interest is taxable to the executive each year and is based on the cumulative outstanding loan. The rate of imputed interest depends on whether the loan is a demand loan or a term loan. A demand loan is any loan payable in full at any time on demand of the lender. To the extent provided in the regulations, such term also includes any loan with an indefinite maturity. A term loan means any loan which is not a demand loan.

To offset the impact of this additional income and the income tax on it for the key executive, the institution gives the executive a bonus to offset the income tax. This bonus can be “grossed-up” to offset the income tax on the bonus.

When the key executive vests in the plan benefits, the vesting doesn't trigger a taxable event (as the endorsement method does). When the executive begins to withdraw benefits (supplemental retirement income), the withdrawals are income tax free up to the basis in the life insurance policy. Therefore, the amount of premiums paid into the life insurance can be withdrawn income tax free.

It's always a challenge to keep the best people on your financial institution's payroll. When you provide a valuable executive benefits package, including split-dollar insurance, you prove your institution's dedication to providing a total compensation package that gives key executives a convincing reason to stay put.

Click here to recruit and retain top executive talent

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Roger versteeg.

As an award-winning executive benefits professional, Roger has qualified numerous times as a lifetime member of the Million Dollar Round Table™ Top of the Table. Roger is a member of the Mankato, Minnesota Chapter of the Society for Financial Services Professionals, the National Association of Independent Financial Advisors, and he has served as President for the Southern Minnesota division of each group. His humble philosophy is to make every conscientious effort to serve his clients in the same manner as he would apply to himself. Roger’s areas of specialty include Deferred Compensation, Advanced Life Insurance Planning, Estate Planning, Salary Continuation, Qualified Plans, and Benefit Pre-funding. Roger holds the FINRA series 6, 7, 22 and 63 licenses.

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IMAGES

Collateral Assignment Split-Dollar Plans
Split Dollar Life Insurance Using Economic Benefit or Loan Regime
Stearns Financial Collateral Assignment Split Dollar (CASD) Plan Explained
Fillable Online bp Split-Dollar-Collateral Assignment Method.indd
Corporate Non-Equity Collateral Assignment Split Dollar Life Insurance
Split-Dollar Plan For Bank Executives

COMMENTS

PDF The Comprehensive Guide to Split Dollar Life Insurance
C.37. Rollout from a Grandfathered Collateral Assignment Split Dollar (with Equity) C.38. Rollout from a Grandfathered Collateral Assignment Split Dollar (No Policy Equity) C.39. Termination of a Grandfathered Collateral Assignment Split Dollar (with Equity) and 162 Bonus of the Corporate Interest in the Policy
Split-dollar executive compensation plans: Doing it right
Collateral assignment split-dollar plans offer a unique incentive to retain top company execs. By Steven Eimert | June 09, 2021 at 09:57 AM
Collateral assignment split dollar: The good, the bad, and the ugly
Collateral assignment split dollar plans can be an effective tool for credit unions to provide attractive executive benefits and incentives. However, they require careful planning, implementation ...
Split Dollar Life Insurance
Under a collateral assignment split-dollar policy, you (the insured person) own the policy, but the other party—often an employer—helps pay the premiums. ... Split-dollar plans can provide ...
PDF Counselor's Corner: The Basics of Split Dollar
Loan Regime Split Dollar. Loan Regime Split Dollar is similar to Non-Equity Collateral Assignment Split Dollar with two key differences: • The annual amount owed by the employee is determined by an interest rate, usually the applicable federal rate (AFR), applied to the outstanding loan balance; and
Split Dollar Plans
Split dollar plans. To learn more, call 1-877-669-6877. Under a split dollar plan, you have the opportunity to reward and retain your key employees. There are 2 types of split dollar plans. Collateral assignment / loan regime. Endorsement split dollar / economic benefit regime. Let's explore the definitions of both.
How Split-Dollar Life Insurance Works
A qualified attorney or tax advisor can help with creating a split-life plan's legal documents. Split-dollar plans are terminated in two ways: at either the employee's death or at a date ...
Split Dollar Tax Planning: a Retirement Plan for Key Employees and High
The "Split" in Split Dollar Plan refers to who pays the policy premiums and how beneficiaries share the cash value/death benefits. There are several different variations of Split Dollar Plans, but for simplicity, the Endorsement and Collateral Assignment methods are the typical options Employers offer their Key Employees. Endorsement Method ...
How to Handle the Accounting for Collateral Assignment Split-dollar
Companies generally use the policies as a Supplemental Executive Retirement Plan ("SERP"), which are considered non-qualified benefit plans. The two most common types of split-dollar life insurance arrangements are endorsement and collateral assignment, which are defined based on which party controls the policy.
PDF Non-Equity Split-Dollar
• To secure their interest in the policy, a collateral assignment in the policy is given to the Contributors by the ILIT. • While the split-dollar arrangement is in place, the Grantors are deemed to have made a taxable gift to the ILIT in an amount equal to the "economic benefit " attributable to the Sponsor's payment of the premiums.
Risks Credit Union Executives and Boards Should Consider With
Many credit union boards propose adding a collateral assignment split-dollar plan (CASD) as a desirable compensation benefit to help retain their top executives. At first glance, a CASD appears to perform similarly to a pension plan. However, this benefit is quite complex, and misunderstanding or making assumptions about a CASD could lead to more risks […]
LIF-17107-14 Split Dollar Guide_NFP
What Is the Collateral Assignment Method? B.5. Why Use the Endorsement Method Versus the Collateral Assignment Method? PREMIUMS. B.6. Who Pays the Policy Premiums Under a Split Dollar Arrangement? B.7. What Is a Non-contributory Plan? B.8. What Is a Contributory Plan? B.9. What Is "Bonus" Split Dollar? POLICY EQUITY. B.10. What Is Policy ...
Understanding The Split-Dollar Life Insurance Benefit
Split-dollar life insurance is an agreement—rather than a policy—between an individual and employer (or trust) using permanent life insurance. The employer pays all or most of the premiums ...
Split-Dollar Versus 457 (f) Plans and What Credit Unions Should
Significant differences between a split-dollar and 457 (f) include the level of complexity, how long the plan is active, and how the benefit is funded or offset by the credit union. For example, a split-dollar is a life insurance policy arrangement that only ends upon the executive's death. A 457 (f) offers shorter, incremental benefits to an ...
Split-Dollar Life Insurance Guide
The two basic types of split-dollar plans are: An economic benefit split-dollar arrangement, in which the employer owns the policy, and a collateral split-dollar assignment, in which the employee ...
How Split-Dollar Life Insurance Can Benefit Employees And
Split-dollar life insurance is not a policy, but rather an agreement between an employer and employee. A contract sets out the obligations and benefits of both parties as they pertain to a cash ...
Split-dollar Life Insurance Plans
Under the collateral assignment method the insured is the policyowner and has premium payment responsibility. The corporation loans the employee the corporation s share of the annual premium, and the corporate amounts are secured by the assignment of the policy to the corporation. ... As with executive bonus plans, a split-dollar carve-out ...
The Big Picture of Split-Dollar Agreements
According to NCUA 5300 data, assets for the most common split-dollar arrangement used in credit unions—"loan regime" or "collateral assignment split-dollar" life insurance—increased 120% percent from year-end 2015 through 2018. A likely reason for this growth is that CASDs can help you retain top execs by providing them extra ...
LIF-17107-14 Split Dollar Guide_NFP
Collateral Assignment. The collateral assignment method is generally employed when the insured 1) desires control over the policy and/or rights to the policy's equity (see discussion of policy equity at ... Under non-contributory plans (also called "employer-pay-all" plans), the split-dollar agreement requires
Splitting the Difference: Why Careful Structuring and Regular
Some employee-participants may also try to lower the economic benefit rates by making the endorsement split-dollar plan with a survivorship policy. Loan Regime With a Collateral Assignment: In a loan regime split-dollar plan, the employee-participant owns the policy, and the employer pays the premiums. Each premium payment is treated as a loan ...
Split-Dollar Insurance: Life Insurance for Executives
The plan can be designed to provide the financial institution with a recovery of the cost of funds used in allocating assets to this very important executive benefit plan. Split-dollar life insurance can be designed in two ways: 1. The endorsement method (economic benefit regime) 2. The loan regimen method (better known as collateral assignment ...
PDF Split Dollar Spotlight: Loan Regime and Nonrecourse Loans
or both, as with a collateral assignment of the policy1 Example: Assume 1) executive E owns a life insurance policy under a split dollar arrangement, 2) X Co., pays premiums on the policy, 3) there is a reasonable expectation that X Co. will be repaid and 4) the repayments are secured by collateral assignment of the policy.
PDF Executive Benefits Insider
Offering retirement benefit plans using life insurance has long been an important element of an employer's ability to attract, retain, and reward their key management employees. While the 457(f) Retirement Plan and Collateral Assignment Split-Dollar (CASD) Plan both have the potential to provide meaningful benefits to employees, important tax ...

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Collateral assignment split dollar: The good, the bad, and the ugly

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RELEVANT GUIDANCE

ACCOUNTING FOR SPLIT-DOLLAR ARRANGEMENTS

Recording the Loan at Issuance

Recording the Interest Accrual

Recording the Settlement of the Loan

Other Considerations for Subsequent Measurement

Value of the Loan

Limited-Recourse

Non-recourse

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Split-Dollar Versus 457(f) Plans and What Credit Unions Should Evaluate

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Split-Dollar Life Insurance

What is split-dollar life insurance?

How does a split-dollar life insurance policy work?

Who owns a split-dollar life insurance policy?

Economic benefit and endorsement agreement

Collateral assignment and loan regime

What are the benefits of a split-dollar plan?

For employees

For employers

How does split-dollar life insurance work for estate planning?

Terminating a split-dollar plan

More From Forbes

The Big Picture of Split-Dollar Agreements

Two strategies for strengthening executive compensation while staying flexible enough to accommodate your leadership continuity plan

1. Pay Attention To The Regulatory Cap For Otherwise-Impermissible Investments

2. Create Benefit Packages You Can Adjust As Needed

Ongoing Oversight Is Critical

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