May 9, 2018
The appropriate method for valuing company-paid life insurance benefits under final split dollar regulations is currently understood to be measured by Table 2001 or an insurance carrier’s published alternative term rates, which meet the specifications indicated in Notice 2002-8. Below is the basis for this industry practice:
Final split dollar regulations provide that the value of current life insurance protection will be based on a premium factor designated in guidance published by the IRS. However, the IRS has not published any new valuation guidance since the issuance of final regulations in 2003. These regulations provide as follows:
1.61-22(d)(3)(ii) Cost of current life insurance protection. The cost of current life insurance protection provided to the non-owner for any year (or any portion thereof in the case of the first year or the last year of the arrangement) equals the amount of the current life insurance protection provided to the non-owner (determined under paragraph (d)(3)(i) of this section) multiplied by the life insurance premium factor designated or permitted in guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter).
Since the issuance of final regulations, the industry has relied on the guidance provided in the IRS Notice, which is the most recent guidance available. Notice 2002-8 prescribes the use of either Table 2001 rates or alternative term rate with additional limitations beginning in 2004, which is designed to assure that the rates used reflect term policies actually sold. Notice 2002-8 states, in relevant part:
For arrangements entered into before the effective date of future guidance, to the extent provided by Rev. Rul. 66-110, 1966-1 C.B. 12, as amplified by Rev. Rul. 67-154, 1967-1 C.B. 11, taxpayers may continue to determine the value of current life insurance protection by using the insurer’s lower published premium rates that are available to all standard risks for initial issue one-year term insurance. However, for arrangements entered into after January 28, 2002, and before the effective date of future guidance, for periods after December 31, 2003, the Service will not consider an insurer’s published premium rates to be available to all standard risks who apply for term insurance unless (i) the insurer generally makes the availability of such rates known to persons who apply for term insurance coverage from the insurer, and (ii) the insurer regularly sells term insurance at such rates to individuals who apply for term insurance coverage through the insurer’s normal distribution channels.
IRS Notice 2002-59 notes the fact that proposed split dollar regulations are silent on the method of valuation and refers to Notice 2002-8 as the relevant authority until further guidance on the method of valuation has been issued. Final regulations are silent on the issue as quoted above and simply refer to IRS published guidance.
While final split dollar regulations are silent on the issue of valuation, IRS audit guidelines for split dollar arrangements published after the issuance of final regulations indicate the IRS’ understanding that post-final regulation arrangements can continue to use Table 2001 or qualifying alternative term rates as indicated by Notice 2002-8.
Regarding valuation of the split dollar life insurance policy, IRS Audit Guidance (03-2005) states the following:
Interim Valuation Rules:
Valuation of current life insurance protection—Determine whether one can use the alternate valuation rates furnished by the insurance provider or should they be using the new Table 2001 rates published in Notice 2002-8. Key factors to consider:
If one is using the lower published premium rates instead of the PS 58 Tables or Table 2001, is the rate being used a published rate available to all persons who apply for term insurance coverage from the insurer? (See section III(3) of Notice 2002-8 for additional rules if the arrangement is entered into after January 28, 2002.)
Is the alternate rate for a one-year standard term policy, all risks, or is the rate based on a policy with a renewal feature?
Request a copy of the rate sheet. The rate sheet will describe the terms of the policy (renewal factor), policy applicability (standard risks, non-smoking), the dollar value of the policy, etc. Look on the rate sheet for items such as “not for publication” or “internal use only.” Check the company’s website—do they sell individual term insurance or do they only sell corporate policies? Any of these factors could indicate that the economic value of the term coverage should be recomputed using Table 2001.
Under the final regulations issued September 17, 2003, it is imperative to determine who owns the split-dollar policy. “…If the employer is the owner of the split-dollar policy, the employer’s premium payments are treated as providing taxable economic benefits to the executive. The economic benefits include the executive’s interest in the policy’s accessible cash value and current life insurance protection. Be certain that if alternate valuation rates are being used to value the current life insurance protection, they meet the aforementioned requirements of all standard risks, the policy is for one year, etc.”
Since the issuance of final regulations in 2003, industry practice has been to follow the most recent IRS guidance available for valuation of the economic benefits provided by a split dollar life insurance arrangement in Notice 2002-8 as discussed above. Several relevant notices and guidance that discuss this standard as current industry practice are as follows: IRS Notice 2002-8 Split Dollar Arrangements, IRS Notice 2002-59 Split-Dollar Life Insurance Arrangements, and Split Dollar Life Insurance Audit Technique Guide (03-2005).