IRS Issues Proposed Regs on Split-Dollar Life Insurance
Tax Analysts Document #2002-15814

      The Service has issued proposed regulations that provide guidance on the income, employment, and gift taxation of split-dollar life insurance arrangements.

Citations: REG-164754-01


The Service has issued proposed regulations (REG-164754-01) that provide guidance on the income, employment, and gift taxation of split-dollar life insurance arrangements.

The proposed regs define a split‑dollar life insurance arrangement as any arrangement (that isn't part of a group term life insurance plan) between an owner of a life insurance contract and a nonowner of the contract under which either party pays all or part of the premiums, and one of the parties paying the premiums is entitled to recover a portion of those premiums and that recovery is to be made from, or is secured by, the proceeds of the life insurance contract.

Under the proposed regs, a special rule applies when an arrangement is entered into for the performance of services. Under that rule, a split‑dollar life insurance arrangement is any arrangement between an owner and a nonowner under which an employer or service recipient pays any portion of the premiums, and the beneficiary of a portion of the death benefit is designated by the employee or service provider or is a person whom the employee or service provider would reasonably be expected to name as beneficiary. The rule applies to arrangements between a corporation and its shareholder under which the corporation pays, directly or indirectly, a portion of the premiums and the beneficiary of a portion of the death benefit is a person designated by, or would be reasonably expected to be designated by, the shareholder. However, the rule doesn't apply to an insurance contract purchase in which the only parties to the arrangement are the policy owner and a life insurance company that is acting in its capacity as issuer of the contract.

The proposed regs also provide two mutually exclusive regimes for taxing split‑dollar life insurance arrangements, the economic benefit regime and the loan regime. Under the economic benefit regime, an owner is treated as providing economic benefits to a nonowner. The economic benefit regime will govern the taxation of endorsement arrangements. Additionally, the economic benefit regime applies if (1) the arrangement is entered into for the performance of services, and the employee or service provider isn't the owner; or (2) the arrangement is entered into between a donor and a donee, and the donee isn't the owner.

Under the loan regime, the nonowner is treated as lending premium payments to the owner. Except for specified arrangements, the loan regime applies to any split‑dollar loan. The loan regime will govern the taxation of collateral assignment arrangements.

A public hearing on the proposed regulations is scheduled for October 23, 2002, in Room 4718 of the Internal Revenue Building, Washington. Persons interested in speaking at the hearing must submit written comments and outlines of oral comments by October 1, 2002.

Send comments and outlines to: Internal Revenue Service, CC:ITA:RU (REG-164754-01), Room 5226, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments can be submitted electronically at http://www.irs.gov/regs.


Tax Analysts, 2002