Split Dollar


Today, we would like to discuss one of the more complex employee benefits we have helped clients vet and determine if it fits within their financial plan – the split dollar plan.

A Split Dollar Plan

A split dollar plan is a voluntary non-qualified program that allows eligible employees to contribute a portion of their salary to the plan on a pre-tax basis. The plan is designed to be supplemental to existing qualified benefit plans. One of the benefits is that it takes advantage of current treasury and IRS guidance by allowing a participant to have a portion of wages be treated as advances from the employer, which are then contributed to the split dollar plan, and then invested in a life insurance policy. The advances are tax free, as long as they are repaid to the employer, which is accomplished by splitting the benefit of the life insurance policy.

Upon your passing, the listed beneficiary and the employer will split the remaining benefit. During retirement, a participant is able to withdraw funds by taking loans against the policy. If done properly, the plan can be advantageous as the contributions are pre-tax, earnings accumulate tax free, and distributions or loans can be received on a tax advantaged basis.

Advantages of a Split Dollar Plan

Some of the advantages are, number one, tax favorability. Growth in the investments are tax deferred, and if done properly, distributions can be completed in a tax advantage way. Number two is the death benefit. For those that have a need or desire to have additional life insurance coverage, the funds contributed to the plan will be invested in at least one universal life policy. Number three, you can invest for risk adjusted growth. The life insurance policies will allow participants to invest in a variety of indexed options but a minimum return of 0% will be applied to each investment.

Disadvantages to Be Aware of

Some potential disadvantages to pay attention to: split dollars are not appropriate for everyone. The plan will only be feasible for a small percentage of eligible candidates. Therefore, it’s important to have a complete view of your financial plans to determine if this is appropriate for you.

Secondly, investment risk. The cash value of the policies can be invested in a variety of funds to gain growth in the plan. As with any investment, there is a risk of under performance, which can impact the cash value and the death benefit. Along with that, investments within life insurance policies are usually capped, meaning that this can limit the return.

Another point of concern is excessive distributions. As you’re pulling money out in the form of loans, this can impact the death benefit and could even force the policy to lapse. Lastly, tax regulations are always changing. Current laws that allow this plan could change, which could eliminate or reduce the advantages of this structure.

Will Split Dollar Work for You?

Before committing to a split dollar plan, it’s extremely important to know how this will fit into your financial plan at various phases of your life. This can be overwhelming, but we’re here to help. Our team at Wealth Dimensions is well versed in the split dollar plan, and we can help determine if it’s a right fit for you and your family.

Give us a call and we can help answer any questions you may have in evaluating the split dollar advantages and disadvantages as it specifically relates to your unique financial situation.

For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Past performance is not indicative of future results. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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