Split-dollar life insurance accounting follows one of two tracks depending on who owns the policy: if the employer owns it and endorses a share of the death benefit to the employee, the arrangement sits in the economic benefit regime under Treasury Regulation §1.61-22; if the employee owns it and the employer advances the premiums, the arrangement sits in the loan regime under §1.7872-15. That ownership question drives every entry on the general ledger, every line on the employee’s W-2, and every footnote disclosure. Get the regime right first, then the mechanics fall into place.
Which Regime Applies to Your Arrangement
The endorsement method makes the employer the policy owner. The employer pays premiums directly to the insurer, controls the cash surrender value, and grants the employee a share of the death benefit through a written endorsement. Because the employer is providing a current benefit, the IRS treats the arrangement under the economic benefit regime.
The collateral assignment method makes the employee the policy owner from day one. The employee names the beneficiary and controls the contract, while the employer advances premiums and takes a collateral assignment of the cash value and enough of the death benefit to guarantee repayment. Because the premium advances look like a secured loan, the arrangement falls under the loan regime.
Some plans start as collateral assignment and later transfer ownership to the employer, flipping into the economic benefit regime. Treasury regulations address this directly: once the non-owner becomes the owner, the economic benefit rules apply from the date of transfer, and the prior premium advances are no longer treated as split-dollar loans going forward.1Department of the Treasury. Split-Dollar Life Insurance Arrangements – Final Regulations The reverse switch, economic benefit to loan, is not contemplated in the regulations. That asymmetry makes the initial structure decision hard to unwind, so choose deliberately.
Economic Benefit Regime: Employer Books and Employee Income
When the employer owns the policy, two threads run in parallel every year. The employer records both an asset and a compensation expense; the employee recognizes taxable income on the value of the coverage being provided.
Employer Balance Sheet and Income Statement
The employer records an asset equal to the policy’s cash surrender value, capped at the amount the employer expects to recover. Under FASB guidance for company-owned life insurance (ASC 325-30, derived from Technical Bulletin 85-4), cash surrender value is the standard measurement, and the difference between premiums paid in a given year and the change in cash surrender value flows through the income statement.
The employer also books an annual compensation expense equal to the economic benefit provided to the employee. When cash surrender value grows faster than cumulative premiums, that growth partially offsets the compensation expense over time.
If the arrangement provides a postretirement death benefit, ASC 715-60 requires the employer to accrue a liability for that future obligation during the employee’s working years, similar to other postretirement benefit promises. That accrual is easy to overlook when an arrangement is designed to continue past retirement.
Employee Taxable Income
Each year, the employee owes income tax on the cost of the life insurance protection the employer is providing, even without receiving any cash. The taxable amount equals the death benefit payable to the employee’s personal beneficiary (not the portion the employer will recoup), multiplied by the appropriate rate from IRS Table 2001 or the insurer’s own published one-year term rates, whichever is lower.2Internal Revenue Service. Notice 2001-10 The insurer’s rates qualify only if they are available to all applicants in standard health, not just to plan participants.
Beyond the pure insurance cost, the employee must also report any policy cash value the employee can currently access and the value of any other economic benefits the arrangement provides.3eCFR. 26 CFR 1.61-22 – Taxation of Split-Dollar Life Insurance Arrangements These amounts appear as non-cash compensation on Form W-2.
Retirement does not stop the calculation. As long as the policy stays in force and the former employee retains a beneficial interest, the annual income inclusion continues, and because Table 2001 rates rise steeply with age, the taxable amount can grow substantially for older retirees.3eCFR. 26 CFR 1.61-22 – Taxation of Split-Dollar Life Insurance Arrangements
Loan Regime: Receivables, Interest, and Documentation
When the employee owns the policy, each premium advance is a loan. The accounting revolves around interest rates, repayment terms, and whether the paperwork will survive IRS scrutiny.
Employer Recording
The employer books each premium advance as a receivable, essentially a note due from the employee. Classification depends on repayment terms: if the loan matures within one year, it is a current asset; otherwise, it sits in long-term receivables.
Interest is where the entries get more involved. The IRS publishes Applicable Federal Rates each month in short-term, mid-term, and long-term buckets.4Internal Revenue Service. Applicable Federal Rates If the split-dollar loan charges interest below the relevant AFR, Section 7872 treats the shortfall as forgone interest.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates For GAAP, the employer recognizes interest income (as if the full AFR were being charged) and a matching compensation expense (the value of the below-market rate the employee is enjoying). The net effect on income is often a wash, but each component has to appear in the right line.
Employee Tax Treatment
The employee does not owe income tax on the premium advances themselves. Receiving a loan is not the same as receiving compensation, and that deferral is the main appeal of the collateral assignment structure. If the loan carries interest below the AFR, the employee recognizes the forgone interest amount as taxable compensation.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates The mechanics treat the transaction as if the employer paid extra compensation and the employee immediately paid it back as interest.
The $10,000 De Minimis Exception
Section 7872 includes a narrow safe harbor: if the total outstanding loan balance between employer and employee stays at or below $10,000 on any given day, the imputed interest rules do not apply for that day.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates Split-dollar premiums almost always exceed $10,000 cumulatively, so this exception rarely helps. It also vanishes entirely if a principal purpose of the interest arrangement is tax avoidance.
Documentation That Holds Up
Loan-regime arrangements stand or fall on their paperwork. Sustaining loan treatment requires a written promissory note with a genuine, unconditional repayment obligation, typically triggered by a fixed maturity date, termination of employment, or the employee’s death. Both borrower and lender must sign a written representation that a reasonable person would expect all payments to be made.6eCFR. 26 CFR 1.7872-15 – Split-Dollar Loans
If the documentation is thin or the repayment obligation looks illusory, the IRS can recharacterize the entire premium payment as current taxable compensation to the employee. That collapses the loan structure retroactively and forces the employee to include the full premium in gross income for the year it was paid. The policy’s cash surrender value must also be sufficient collateral to make repayment credible; a policy heavily borrowed against may not pass that test.
Termination and Rollout
Split-dollar arrangements do not last forever, and the exit has its own tax event. If the employer transfers the policy to the employee (or the employee’s trust), the employee recognizes income equal to the excess of the policy’s fair market value over the sum of two items: the amount the employee pays the employer for the contract, and the cumulative economic benefits the employee has already been taxed on.3eCFR. 26 CFR 1.61-22 – Taxation of Split-Dollar Life Insurance Arrangements Fair market value for this purpose equals the policy’s cash value plus the value of all other contract rights, excluding the value of current life insurance protection. Years of accumulated cash value can trigger a large income event at rollout, which catches people off guard when they have not planned for it.
If the transfer is connected to the performance of services and the policy is still subject to a substantial risk of forfeiture, income recognition is delayed until the policy vests under Section 83. After the transfer, the former non-owner becomes the policy owner for all federal tax purposes going forward.
Financial Statement Disclosures
Regardless of regime, the employer’s financial statements must reflect the arrangement’s economic substance, and auditors read these disclosures closely. GAAP calls for the employer to disclose the nature of the arrangement (loan or economic benefit) along with:
- The asset or receivable amount recorded on the balance sheet.
- The aggregate policy face amount under the arrangement.
- The benefit calculation method, meaning whether Table 2001 rates or insurer rates were used.
- Loan terms, including repayment triggers, stated interest rates, and any AFR imputation.
- Any accrued postretirement obligation for continuing death benefits, with the accounting standard applied (ASC 715-60).
Boundaries Worth Knowing Before You Set the Structure
A few rules sit outside pure accounting but decide whether an arrangement is even permissible or whether the death benefit stays outside the taxable estate.
Public companies cannot use the loan regime for executives. Section 402 of the Sarbanes-Oxley Act, codified at 15 U.S.C. §78m(k), makes it illegal for a publicly traded company to extend, maintain, or arrange personal loans to its directors or executive officers.7Office of the Law Revision Counsel. 15 USC 78m – Periodical and Other Reports That prohibition effectively rules out collateral assignment for public-company executives. The statute grandfathers loans that existed before July 30, 2002, as long as they have not been materially modified or renewed. Private companies may use either structure.
Incidents of ownership can pull the death benefit into the employee’s estate. Life insurance proceeds are included in a decedent’s gross estate if the decedent held any incidents of ownership in the policy at death, including the power to change the beneficiary, surrender the policy, assign it, or borrow against its cash value. Under an endorsement arrangement, the employer is the formal owner, but side agreements that leave the employee any of these powers can still cause estate inclusion. Controlling shareholders face an additional attribution rule: if the decedent owned more than 50% of the company’s voting stock, incidents of ownership the corporation holds are attributed back to the decedent for proceeds not payable to or for the corporation’s benefit.8eCFR. 26 CFR 20.2042-1 – Proceeds of Life Insurance
ERISA may apply. When a split-dollar arrangement is part of a broader employee death benefit plan, it can be an ERISA welfare benefit plan. The Department of Labor has confirmed that ERISA fiduciary standards apply to the selection and retention of the underlying policy, so the employer must choose the insurer and policy structure prudently and solely in the interest of participants.9U.S. Department of Labor. Advisory Opinion 1992-22A Welfare plans covering fewer than 100 participants that are unfunded or fully insured are generally exempt from Form 5500 filing.10Department of Labor. 2025 Instructions for Form 5500 Most split-dollar plans cover a handful of executives and fall below that threshold; plans covering 100 or more participants must file annually, and large plans must also complete Schedule H.