Split Dollar is Back
The Tax Cuts and Jobs Act of 2017 (TCJA) has brought substantial changes to all areas of federal taxation, including the new qualified business income deduction rule contained in the new IRC section 199A. As a result, qualified and non-qualified retirement and pensions will be impacted going forward. The TCJA is the most significant tax cut since the 1986 Tax Reform Act. Business owners now have new options for directing their income in order to mitigate their tax burden.
Now that the tax rate for C-Corporations has reduced to a flat tax of 21%, down from as high as 35%, Split Dollar plans have once again become an attractive solution for business owners.
What is Split dollar?
Think of split-dollar life insurance as a way to take advantage of differing tax rates. If it is being done for an employee it is a way to create a golden handcuff type of plan to retain key employees.
Split-dollar, when properly set up, is a tax beneficial arrangement in which a company and a person split and share a life insurance contract.
- A corporation makes premium payments into a policy that is owned by an employee or the owner of the corporation
- These premium payments are not considered income to the participant they are considered a loan
- The Corporation retains ownership in the policy up to the contributions it has made
- The participant receives all of the gains with no tax consequences
The corporation’s contributions are actually considered loans to the participant. The participant often has the option to continue the policy upon the termination of the agreement or even make contributions of their own. Should the employee pass away, the named beneficiary will receive a tax-advantaged death benefit. The corporation’s contributions could even be paid back via the cash value of the policy.
Tax Benefits of Split Dollar
The most attractive benefit of a Split Dollar Plan is that it allows a business owner to leverage their C-Corp tax rate, to grow funds for themselves personally:
- Rather than the premiums being taxed at their ordinary income tax rate, the premiums are taxed at only 21%
- The owner receives all of the gains on the policy with no tax consequences.
- While the plan is growing or active, the corporation can access or recapture funds from the policy if needed.
This is an ideal plan for any business owner who has a c-corp that has a large amount of retained earnings.
It’s no secret that a Split Dollar plan benefits not only the employee(s) but even more so the employer. Split Dollar plans provide business owners with the flexibility to choose a group of executives or just one key employee, as well as, the versatility to have a different benefit for each.
A Split Dollar Plan is relatively easy to establish (IRS approval is not required, and administration is minimal.) Additionally, the plan is treated as an asset of the business; Life Insurance policy cash values are an asset on the business’ balance sheet, and the cash value grows on a tax-deferred basis.
The tax advantages of life insurance also help the employer to establish this type of plan in a cost effective manner. Unlike other fringe benefits, the business normally recoups the cost, and the death benefit proceeds are normally received income tax free. A Split Dollar arrangement may also cost less than the after-tax compensation dollars required to provide an equivalent benefit.
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