Many of you have likely been asked for guidance in determining strategies to attract, retain, and reward key individuals within a tax-exempt organization.
Split dollar life insurance arrangements, where the employer advances policy premiums via a loan to the insured executive participant in exchange for an interest in the policy cash value and death benefit until the loan is repaid, have been used increasingly as a replacement for traditional nonqualified deferred compensation arrangements mostly because of the cumbersome vesting and taxation rules associated with Section 457(f).
Now the potential exists to use split dollar plans to mitigate the significant additional expense of the new 21 percent excise tax, making it even more favorable as a part of an executive compensation package. The remuneration subject to the new tax in Section 4960 includes deferred compensation benefits that are includible in income (some exceptions apply). Split dollar plans are considered loans pursuant to Section 7872 and, therefore, are not included in remuneration.
The most publicized plan is, of course, Jim Harbaugh’s arrangement with University of Michigan. In 2016, it was reported that his split dollar policy will receive six annual installments of $2M with an estimated $75M death benefit.
Including split dollar as a component of a compensation package provides benefits to the employer and employee. Employees benefit from a design providing tax free death benefit and future tax free income^ with minimal out of pocket costs.
Universities, credit unions and other not for profit organizations benefit from incenting and motivating the employee to stay, flexibility and control over the plan design and funding depending on performance and best of all recovery of advanced contributions and loan interest – which is why we are increasingly seeing it used.
Fulcrum Partners has much experience in designing plans that are viable alternatives to Section 457(f) plans. We provide plans with the following benefits:
- Off balance sheet liability
- Reduction or elimination of substantial risk of forfeiture on the employee
- Vesting options
- Tax advantaged investment alternatives and distributions
- Clarity on taxation of contributions in the plan
- More friendly optics on Form 990
^ under current tax law withdrawals and loans from life insurance can be received free of income tax
Securities offered through ValMark Securities, Inc. Member FINRA, SIPC, 130 Springside Drive, Akron, OH 44333-2431, Tel 1-800-765-5201. Investment Advisory Services offered through ValMark Advisers, Inc. which is a SEC Registered Investment Advisor. Fulcrum Partners LLC is a separate entity from ValMark Securities, Inc. and ValMark Advisers, Inc.