Revenue Ruling 84-15: Split-Dollar Life Insurance
Rev. Rul. 84-15 provides the tax framework for valuing a life insurance policy when transferred from an employer to an employee in a split-dollar plan.
Revenue Ruling 84-15 is an Internal Revenue Service (IRS) guideline on the income tax outcomes for an employee when a life insurance policy is transferred under a split-dollar arrangement. The tax rules for these arrangements changed for any plan entered into or materially modified after September 17, 2003. Newer plans are taxed under an “economic benefit regime” or a “loan regime,” based on who owns the insurance contract. As a result, the guidance in Revenue Ruling 84-15 is now limited to “grandfathered” plans established on or before that date.
The Split-Dollar Arrangement Context
Revenue Ruling 84-15 addresses a type of plan where the employer initially owns the life insurance policy and pays the premiums. The employer holds rights to the policy’s cash surrender value, which represents a savings component that grows within the policy over time. The employee insured by the policy has the right to name the beneficiary of the death benefit portion.
The ruling covers the event when the arrangement is terminated and the employer transfers complete ownership of the policy to the employee. This transfer happens after a set number of years or upon an event like retirement. At this point, the employee gains control over the entire policy, including its accumulated cash surrender value and the right to the full death benefit.
Determining the Employee’s Taxable Income
The ruling establishes how to calculate an employee’s taxable income from the policy transfer. The amount included in the employee’s gross income is the policy’s cash surrender value at the moment of transfer, reduced by any amount the employee personally contributed toward the premiums. The cash surrender value is the amount an insurance company would pay if the policy were terminated before death.
For example, if a policy has a cash surrender value of $50,000 when transferred, and the employee had paid $5,000 in premiums, this contribution is subtracted from the total value. In this scenario, the employee must report $45,000 as taxable income for the year. This income is considered compensation and is subject to ordinary income tax rates. The value of the policy built up from the employer’s payments is treated as a form of deferred compensation.
Employer Tax Considerations
The employer’s tax consequences are linked to the amount the employee includes in their income. When the employee recognizes income from the transfer, the employer may be entitled to a corresponding business expense deduction, provided the amount is considered reasonable compensation for the employee’s services. The IRS assesses reasonableness by looking at the employee’s role, compensation for similar positions, and the business’s financial condition.
The employer’s premium payments made before the transfer are not deductible. The deduction only becomes available when the policy is transferred and its value becomes taxable income to the employee.