Definition
Split Dollar Coverage refers to an arrangement where an employer and an employee share the costs of an insurance policy’s premium. This financial approach is typically employed with life insurance policies and offers a flexible means of providing valuable benefits to employees while managing costs for employers.
Meaning
Split Dollar Coverage offers a strategic way for both employers and employees to benefit from life insurance without one party shouldering the entire financial burden. The specifics of how the premium cost is divided can vary, often tailored to the needs and agreements of the employer and employee.
Etymology
The term “Split Dollar Coverage” derives from the method of “splitting” insurance premium costs between two entities and the word “dollar,” referencing the financial component of insurance policies.
Background
Historically, Split Dollar Coverage emerged as an innovative employee benefit tool in the mid-20th century, gaining traction in corporate America. It allowed companies to offer appealing perks to talented employees, ultimately enhancing employee retention and satisfaction.
Key Takeaways
- Cost-Sharing Arrangement: Split Dollar Coverage divides the insurance premium costs between the employer and the employee.
- Versatile Options: The premium splitting approach can vary based on the type of policy and specific agreement.
- Employee Benefits: Employees gain valuable life insurance with shared cost responsibility, enhancing their financial security.
- Employer Advantages: Employers can offer competitive benefits to attract and retain employees without bearing full premium costs.
Differences and Similarities
- Group Insurance Policies: Unlike split dollar coverage, group insurance policies typically do not require employees to share premium costs significantly.
- Executive Bonus Plans: Both arrangements aim to provide life insurance benefits, though Executive Bonus Plans commonly involve the employer contributing to the employee’s income to purchase life insurance, while split dollar involves direct sharing of premium payments.
Synonyms
- Cost-Sharing Life Insurance
- Shared Premium Insurance Plan
- Employer-Employee Life Insurance Agreement
Antonyms
- Fully Employer-Funded Insurance
- Fully Employee-Funded Insurance
Related Terms
- Key Person Insurance: Life insurance on the key employees whose death would lead to financial loss for the company.
- Deferred Compensation Plan: A plan where a portion of employees’ income is paid out at a later date, often providing tax benefits.
- Permanent Life Insurance: A type of life insurance designed to provide coverage for the policyholder’s entire life.
Frequently Asked Questions (FAQs)
What is the main benefit of Split Dollar Coverage?
The primary benefit is the shared responsibility for premium payments, making life insurance more affordable and accessible for employees.
How is Split Dollar Coverage typically structured?
There are two main types: collateral assignment, where the employer loans the premium to the employee, and endorsement method, where the employer owns the policy but grants certain rights to the employee.
Are there tax implications in Split Dollar Coverage?
Yes, there can be. The IRS may treat the employee’s share of premiums or the economic benefit received from the policy as taxable income.
Can Split Dollar Coverage be canceled?
Yes, if the arrangement is no longer practical, both parties can agree to terminate the coverage.
Quizzes
Exciting Facts
- Split Dollar Coverage became especially popular in the 1980s as a way to provide high-value executive benefits.
- Famous corporations have used Split Dollar Agreements as part of their executive packages, including Fortune 500 companies.
Quotations
“The best way to predict the future is to create it.” — Peter Drucker
Proverbs
“It takes a village to raise a child.” Likewise, it takes both employer and employee working together to share the costs of security.
Humorous Saying
“Why do life insurance salesmen aim for your heart? Because they know that’s where they’ll find your wallet!”
Government Regulations
In the United States, the IRS has specific guidelines for Split Dollar arrangements, such as Notice 2002-8 and final regulations under sections §§ 1.61-22 and 1.7872-15.
Suggested Literature
- Understanding Life Insurance by Karen S. Sicking
- Employee Benefits and Executive Compensation: Tax and Legal Guide by Andrew J. Sherwood
Inspirational Farewell
Remember, life is short and full of potential! Sharing the load makes everyone’s journey lighter and more enjoyable. Until next time, happy learning and stay insured!
— Jonathan Fineman, 2023
