Split-Dollar Life Insurance for Executives: Tax Treatment & Planning

Split-dollar life insurance is an arrangement in which an employer and an executive share the costs and benefits of a life insurance policy. The employer typically pays some or all of the premiums; the executive (or the executive's irrevocable trust) receives some or all of the death benefit. What looks simple on the surface conceals significant legal and tax complexity — particularly around which party owns the policy, how the economic benefits are taxed each year, and what happens when the arrangement unwinds at retirement, departure, or death.

These arrangements were heavily abused in the 1990s and early 2000s. In 2003, the IRS and Treasury finalized regulations under Reg. §1.61-22 and Reg. §1.7872-15 that eliminated the tax shelter potential and established the current framework. If you have a split-dollar arrangement at your company — or are negotiating one — the post-2003 regulatory regime governs your tax treatment.

Two regimes: economic benefit vs. loan

The final regulations¹ require that every split-dollar arrangement be classified under one of two mutually exclusive regimes, determined by which party owns the policy:

Economic benefit regime (employer-owned)

Under the economic benefit regime, the employer owns the cash value and pays premiums; the executive benefits from term life insurance protection — the "economic benefit" of the death proceeds. Each year, the executive must recognize taxable income equal to the cost of the current life insurance protection provided.¹

How taxable income is calculated: Table 2001

The annual taxable cost of insurance is calculated by multiplying the net amount at risk (the portion of the death benefit the executive's estate or beneficiaries would receive) by the IRS Table 2001 rates, which are age-based term insurance rates published in IRS Notice 2002-8.² If the insurer publishes its own alternative term rates that meet the regulatory specifications, the lower of the Table 2001 rate or the insurer's rate may be used. The executive reduces this amount by any premium they personally contribute.

Table 2001 rates are substantially lower than the old PS 58 rates they replaced — particularly at younger ages — which reduces the annual taxable benefit for most executives.

FICA treatment

The annual Table 2001 economic benefit is treated as wages subject to FICA. At senior executive compensation levels, the Social Security wage base ($184,500 for 2026³) is typically already exceeded by salary alone, so no incremental Social Security tax applies. The 2.9% Medicare tax (including 0.9% Additional Medicare Tax on wages over $200,000 single) applies to the economic benefit amount.

At retirement or termination

When an economic benefit arrangement ends — at retirement, departure, or plan termination — the employer typically receives the full cash value (having been the owner throughout). The executive receives no additional taxable income at termination beyond the annual Table 2001 amounts already recognized. The arrangement simply ends: the employer keeps the policy and its accumulated value, and the executive's death benefit endorsement is released.

Because the executive only ever received the annual economic benefit (term insurance protection), there is no "rollout" income event under the economic benefit regime.

Loan regime (executive-owned / collateral assignment)

Under the loan regime, the executive (or the executive's irrevocable life insurance trust, ILIT) owns the policy. The employer loans premium amounts to the executive each year. The policy cash value is assigned to the employer as collateral for the loans.

Below-market loan income

For the loans to avoid immediate income recognition, they must bear interest at least equal to the Applicable Federal Rate (AFR) for the appropriate term, published monthly by the IRS.⁴ If the employer charges no interest or below-AFR interest, the forgone interest is treated as compensation income to the executive under IRC §7872 — ordinary income and subject to FICA and withholding in the year imputed.

In practice, most employers charge AFR interest under a loan regime arrangement. The executive pays AFR interest to the employer each year (often netted from salary). No income is recognized beyond that annual interest — the premium loans themselves are not income while the arrangement is active.

At termination or death

When the arrangement terminates, the loans must be repaid from the policy's cash value or death benefit proceeds. The mechanics:

• During life. At termination, the employer is repaid from the policy cash value (or the executive pays from other sources). If the loans are forgiven rather than repaid, the forgiven amount is ordinary income to the executive in the year of forgiveness.
• At death. The employer receives its loan balance from the death benefit; the remaining proceeds (the "net death benefit") pass to the executive's estate or trust beneficiaries income-tax-free under IRC §101(a).

The loan regime can be very attractive for estate planning because the executive (through an ILIT) accumulates policy cash value and ultimately receives a tax-free death benefit — while the employer's premium exposure is protected as a loan (an asset on its balance sheet).

Equity split-dollar: the pre-2003 structure

Before the 2003 final regulations, some arrangements allowed executives to receive the full cash value accumulation without repaying the employer — a structure regulators viewed as equity split-dollar (the executive effectively received the equity buildup inside the policy as disguised compensation). The final regulations eliminated favorable tax treatment for equity split-dollar arrangements entered into or materially modified after September 17, 2003. Any such benefit is now recognized as ordinary income when vested.¹

Executives with pre-2003 split-dollar arrangements that have not been modified may still be grandfathered under prior-law treatment, but this requires a careful legal review.

Section 409A considerations

Split-dollar arrangements interact with Section 409A, but IRS Notice 2007-34⁵ provides that properly structured split-dollar plans under either regime are generally not treated as nonqualified deferred compensation subject to 409A's election and distribution timing rules:

• Economic benefit regime. If the employer retains the right to recover all premiums from the policy (which is the defining feature of the endorsement structure), no deferral of compensation is created — the arrangement is excluded from 409A.
• Loan regime. Bona fide loans bearing adequate interest are excluded from 409A as loans, not deferred compensation.
• Equity-type arrangements. If the employer does not expect to recover its full premium outlay (e.g., in cases where the benefit is designed as deferred compensation), the arrangement may be treated as a deferral subject to 409A. This requires careful plan design and legal review — see our Section 409A guide.

When companies use split-dollar for executives

ILIT funding for estate planning

High-net-worth executives with taxable estates use irrevocable life insurance trusts (ILITs) to hold life insurance outside their taxable estate. Split-dollar under the loan regime lets the employer fund the ILIT's premiums efficiently — the ILIT borrows from the company, the policy accumulates, and the net death benefit passes estate-tax-free to heirs. For executives with concentrated stock positions or NQDC balances that create large estate inclusion, ILIT-funded insurance is one of the few tools that delivers truly estate-tax-free wealth transfer. See the executive estate planning guide.

Supplemental retirement income (SERP alternative)

Some companies use loan regime split-dollar as an alternative or supplement to a formal SERP. The executive (or ILIT) builds cash value inside the policy over the working years. At retirement, the policy can be surrendered or borrowed against to generate retirement income — though withdrawals and loans from life insurance are not deferred compensation and do not provide the structured distribution guarantee a SERP does.

Key-person and buy-sell coverage

At private companies and closely held businesses, split-dollar can fund buy-sell agreements — the employer pays premiums; the death benefit funds a cross-purchase or redemption of the executive's ownership stake. The tax regime (economic benefit vs. loan) depends on who owns the policy and is negotiated as part of the buy-sell structure.

Planning considerations

• Regime selection is locked in by ownership. The choice of who owns the policy is a legal decision made at the outset. Switching from economic benefit to loan regime (or vice versa) is treated as a material modification triggering the 2003 final regulations if the arrangement was previously grandfathered.
• AFR tracking matters in the loan regime. The applicable AFR term should match the expected duration of the arrangement. Using short-term AFR for a long-term arrangement can create rate mismatch exposure if market interest rates rise.
• 280G exposure at acquisition. Split-dollar arrangements that vest or accelerate at a change-of-control are potentially excess parachute payments under § 280G. The present value of accelerated benefits is added to the §280G base. Review the plan document for change-of-control provisions before a transaction closes.
• COLI disclosure. If the employer uses corporate-owned life insurance (COLI) to fund a SERP or split-dollar plan, IRC §101(j) requires written notice to and consent from the executive before policy issuance and employer tax-free receipt of death benefits. Missing this notice eliminates the income tax exclusion on the death benefit — a material cost to the employer.
• Creditor risk. The loan regime does not provide bankruptcy protection on the executive's side — the employer holds a secured creditor claim against the policy. If the executive's ILIT is the policy owner and the arrangement is structured correctly, the employer's claim is against the ILIT (not the executive personally), but the overall creditor dynamics should be understood.

1. Treas. Reg. §1.61-22 — Taxation of split-dollar life insurance arrangements; final regulations T.D. 9092 (Sept. 17, 2003). Establishes economic benefit and loan regimes, Table 2001 rate references, and equity split-dollar treatment. 26 CFR § 1.61-22 via LII.
2. IRS Notice 2002-8 — Table 2001 term insurance rates used to value the economic benefit of life insurance protection under the endorsement (economic benefit) regime. Replaced obsolete PS 58 tables with materially lower rates. IRS Notice 2002-8.
3. Social Security wage base $184,500 for 2026. SSA contribution and benefit base.
4. Treas. Reg. §1.7872-15 — Split-dollar loans; AFR minimum interest requirement for loan regime arrangements. Monthly AFR published by IRS in Rev. Rul. bulletins. 26 CFR § 1.7872-15 via LII.
5. IRS Notice 2007-34 — Guidance on application of Section 409A to split-dollar life insurance arrangements. Economic benefit and bona-fide-loan arrangements generally excluded from 409A; equity-type or deferred-compensation-character arrangements subject to 409A. IRS Notice 2007-34.
6. IRC § 101(j) — Employer-owned life insurance; written notice and consent requirements for employer to exclude death benefit from gross income. Penalties for noncompliance include income inclusion of all proceeds exceeding premiums paid. IRC § 101 via LII.

Values verified as of July 2026. Final split-dollar regulations (T.D. 9092) effective for arrangements entered into or materially modified after September 17, 2003.