Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has a split dollar life insurance plan that has been in effect since 1998.  The plan is an equity split dollar plan, with net cash values growing on the client’s side of the ledger.  Must the client change the way the plan is being reported from a tax perspective in light of the split dollar regulations published in 2003?

Answer: Not necessarily.

Pre-2002 in-force split dollar plans need to account for equity growth—either under loan regime or enhanced economic benefit regime—if the participant doesn’t want to recognize an income tax result on the entire policy cash value at rollout.  If the participant doesn’t care about that, old plans can continue to account for the plan as they did prior to all the new split dollar rules.

That means that using the economic benefit rates in effect prior to Table 2001 is still OK.

The first IRS warning that it was going to change the split dollar rules was Notice 2001-10 in 2001.

http://www.irs.gov/pub/irs-drop/n-01-10.pdf

In that Notice, the IRS said that it was going to tax the growth in equity split dollar plans—even in-force policies.  See page 12 of the Notice, the full paragraph numbered 1.

However, Notice 2002-8 repealed Notice 2001-10.  Notice 2002-8 says that an equity split dollar plan in effect as of the date of the Notice can continue to just use the old PS 58 rates as the measure of the economic benefit.  If the parties do that, all the cash value in the policy will be taxable to the employee upon release of the split dollar interest.  See Part IV, Section 4 of the Notice.

http://www.irs.gov/pub/irs-drop/n-02-08.pdf

The final Split Dollar Regulations incorporate Notice 2002-8’s grandfathering provisions for existing plans.

http://www.irs.gov/pub/irs-regs/td9092.pdf

Finally, here’s expert commentary on the effect of the final regulations.  See Section V, which also deals with the rollout problem with non-grandfathered policies.

http://www.theweinberggroup.com/wealth/articles/is_10_03.htm

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