Writer Submits Suggestions for Proposed Split-Dollar Regs
An unidentified writer has submitted comments on the proposed regulations (REG-164754-01) regarding the taxation of split-dollar life insurance arrangements.
Document Type: Public Comments on Regulations
Tax Analysts Document Number: Doc 2002-24531 (3 original pages) [PDF]
Tax Analysts Electronic Citation: 2002 TNT 212-28
=============== SUMMARY ===============
An unidentified writer has submitted comments on the proposed regulations (REG-164754-01) regarding the taxation of split-dollar life insurance arrangements. (For a summary of REG-164754-01, see Tax Notes, July 15, 2002, p. 361; for the full text, see Doc 2002-16108 (24 original pages) [PDF], 2002 TNT 135-10 , or H&D, July 5, 2002, p. 175.)
The writer urges that neither employee contributions to a split- dollar arrangement nor death benefit proceeds should be taxable to an employer. Also, the writer asserts that the regs lack clarity with respect to the annual taxation of cash value accruals. Finally, the writer believes that more must be done to ensure that existing arrangements are not treated unfairly under the proposed regs.
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Subject: Comment from Web Site
reg=Split-Dollar Life Insurance Arrangements
 I see no reason why economic benefit taxation should be limited to non-equity split dollar plans and plans in which the policy owner is the premium payer. Why not establish both an economic benefit regime and a loan regime, each with their own set of tax consequences but permit taxpayers to elect either one? Thus a policy set up under an equity split dollar plan, even though owned by an employee, could elect to have the employee taxed on the term cost and the employee would be taxed ultimately on his cash value (see suggestion below). An employer owned policy could be set up as a below-market loan. This would give greater flexibility to taxpayers, yet treat the public fisc fairly too.
 The regulations deny any cost basis for employee contributions to a split-dollar plan. This flies in the face of the treatment of life insurance in pension and profit-sharing plans. If life insurance is provided under those plans the participant reports a term cost as taxable income yearly. But those cumulative amounts of taxable income are fully recoverable against taxable income at death and at retirement. Employees should get cost basis for their contributions.
 The regulations state that employee contributions are taxable to the employer. This makes no sense. Why should monies paid to the insurer be treated as income to the employer? The employee contributions are not income -- but merely reductions in the amount the employer is required to pay. The employee is certainly not paying for any benefit that the employer will enjoy Employee contributions should continue to be treated the way they are today as part of a joint payment for a life insurance policy.
 The regulations state that any death proceeds received by the employer in excess of its contributions are taxable. This denies employers the broad tax-free treatment of life insurance proceeds otherwise provided under our tax code. I cannot see how the there can be any justification for voiding the statutory tax-free treatment of life insurance benefits under Section 101(a) of the Internal Revenue Code. An employer should received proceeds tax-free unless some other statutory exemption applies (e.g. a non-exempt transfer for value)[.]
 The regulations fail to offer much needed guidance on alternative term insurance rates to be used as an alternative economic benefit measure (in place of Table 2001 rates promulgated in Notice 2001-10). Table 2001 is a much higher rate table than the alternative insurance company rates currently being used for split- dollar plans. While some of the current rates being used are unreasonably low, the new Table 2001, based on the same Table I used for group term life, is too high. Table I is not based on individually underwritten lives, but on groups of non-medically underwritten employees under group contracts. There are several possibilities that would be fair: 1) initial rate under the issuing company's 10 year level term contracts (the one-year term product is almost non-existent these days as a standalone policy) OR 2) for participating whole life plans, the issuing company's actual one-year term rate used in its term dividend option or, for universal life (including variable universal life), the current cost of insurance (COI) actually being applied as a charge for the amount at risk under the contract OR 3) create a more realistic uniform government table, perhaps based on a composite of the rates (described above) used by, say, the top 25 life insurance companies. This information could be gathered by the industry and submitted to IRS then reviewed every five years.
 The regulations raise the specter of annual taxation of cash value increases accruing to the executive under endorsement split-dollar plans, but this is not spelled out. It is clear that these increases will be taxed, but the timing of the taxation is not clear at all. The preface to the regulations implies that the taxation will occur annually, but the regulations themselves do not say this. I urge that the final regulations clarify this, hopefully delaying recognition of the income until the arrangement is undone and the employee takes over the policy.
 The regulations state that any money paid out to an employee (under endorsement plans) during life will be taxable as compensation. If there is to be annual taxation of the executive's cash value accrual, this makes no sense. If the cash value has been taxed already, access to those values should be tax free. If the taxation of the yearly accruals is deferred as I've suggested above, then the taxation of distributions makes sense, but the payments includible in employee income should be cost basis for the employee deductible from cash values when they are eventually taxed.
 There is no guidance on how existing plans will be taxed. The safe harbor
rules of Notice 2002-8 permit taxpayers to avoid taxation of employee equity
upon termination (or conversion to Loan split-dollar) of any pre 1/28/2002
equity split dollar plan. But what will be the treatment of plans that do not
convert of terminate? If new rules apply only to plans created after
regulations are final, what rules apply to the old plans? I urge that the
employee cash values of plans put in place prior to 1/28/2002 be treated in the
following way: 1) under endorsement plans, the cash value increases that occur
after 1/28/2002 be taxed at the termination of the split- dollar arrangement
during the insured's lifetime. Any employee cash values that were accrued up to
 In conclusion, split dollar plans have been set up for over 36 years based on the understanding of Revenue Rulings, private rulings and the IRC by tax practitioners, insurance practitioners and taxpayers. There was ample time for the government to expand and/or clarify RR 64-328, RR 66-110 and others, and to announce prospective changes in the rules. It is unfair to announce tax treatment that is radically different and apply it retrospectively. The new approach to these plans should apply to new plans only, and all existing policies should be treated with the utmost fairness and liberality.
Code Section: Section 72 -- Annuities; Section 101 -- Death Benefits
Subject Area: Insurance company taxation
Industry Group: Insurance
Cross Reference: For a summary of REG-164754-01, see Tax Notes,
for the full text, see Doc 2002-16108 (24 original pages) [PDF], 2002 TNT
135-10 , or H&D,
Institutional Author: unidentified