IRS Proposes to Tax Split-Dollar Life Insurance Plans

The Internal Revenue Service and the U.S. Treasury Department released proposed regulations this week that clarify the tax rules relating to split-dollar life insurance arrangements.

A split-dollar life insurance plan is one in which premiums and/or benefits of the plan are split between two parties. The new proposed regulations seek to provide guidance for tax assessments relating to these types of plans.

The application of the proposed rules depends on the ownership of the policy. If an employer is making payments on a policy that is owned by an employee, the premium payments that contribute to the cash value of the policy will be considered loans, and market-rate interest will be imputed and taxable to the employee until such time as the employee repays the employer for the premiums. If the employee is not expected to repay the employer for the premiums, then the amount of the premiums will be taxed as ordinary income to the employee at the time the premiums are paid. Alternatively, premiums may be treated as a transfer of the increase in case value. At present, the IRS has not chosen to tax cash surrender value that exceeds the amount of premiums.

If the employer is the owner of the plan, the employee will be taxed on the "economic benefit" he or she derives from the plan, including the value of life insurance protection and dividends earned. For purposes of determining the value of life insurance protection, taxpayers may refer to the premium rate table that appears in IRS Notice 2002-8 that was released earlier this year. This new table has been revised to reflect current mortality rates.

Although the IRS has revoked Revenue Ruling 55-747, the rate tables published in that ruling may still be used for determining the value of current life insurance protection for life insurance plans in place prior to January 28, 2002.

The new guidance is in the form of proposed regulations and it is expected that the insurance industry may lobby for changes to these rules. A public hearing on the proposed regulations is scheduled for October 23, 2002, at 10 a.m., Room 4718, Internal Revenue Building, 1111 Constitution Ave. NW, Washington D.C. Written comments, which must be received by October 7, 2002, may be sent to:

Internal Revenue Service
Attn: CC:ITA:RU (REG-164754-01),
Room 5226
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

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