subject: Split Dollar Plans [print this page] Split Dollar Plans Split Dollar Plans
In today's competitive business world, it is more important than ever to attract and keep the best talent. Although high wages can certainly pay for a person who has the skills the business needs, offering other important benefits is another good strategy to employ. In particular, purchasing life insurance for the employee is one way to provide them with a sense of security that their loved ones will be taken care of should anything happen to them. However, if you are a small business or otherwise are limited on funds, offering to do a split plan with the employee is a good way to offer this benefit while avoiding stretching the company budget.
A split dollar plan is not an actual insurance plan but a way for the employee and the employer to share the cost of a life insurance policy. Usually how the split happens is the employer pays the cash benefit portion of the insurance plan while the employee pays the other fees associated with the managing the plan. If the employee dies, the employer recoups their invested cash and the beneficiary is given the balance of the death benefit. For example, if the company takes out a $500,000 policy on their employee and pays $100,000 of the cash benefit, that money is returned to them and the remaining $400,000 is given to the stated beneficiary.
For the most part, split dollar plans are information arrangements as they are not legally recognized by the Internal Revenue Service. There are a few different ways such an arrangement can be implemented. The Collateral Assignment Method has the employee purchasing the insurance policy listing them as the owner and whoever they want as the beneficiary. The employer is given collateral assignment of the policy which ensures they get the money they invested into the policy.
The Endorsement Method has the employer purchasing the policy and being listed as the owner and beneficiary of the cash benefit they invested. In a separate written agreement, the employee and employer list the terms of the employee's and their beneficiary's rights to the policy. The Usual Arrangement Method has the employee as the owner with their preferred beneficiary. However, they include an assignment transfer of a portion of the policy that is equal to the employer's investment of funds. This ensures the employer is paid first and the beneficiary receives what is leftover. Whichever option is chosen, it is best to work with a knowledgeable attorney to make sure the agreements are setup properly and fairly.
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