The Use of Deferred Compensation Funds – Part 2
The changes in the tax treatment of split dollar plans focus on the issue of policy ownership. If the employee owns the policy (collateral assignment arrangement), then any premium payment by the employer is considered a loan. The employee will owe interest payments to the employer at the Applicable Federal Rate (AFR). The loan payments can be structured as either a term loan (higher interest rates initially, but providing a cap-advantageous in a low-interest-rate environment), or as a demand loan (allowing a lower initial rate, but adjusted every month-or once a year if a blended rate is used). The employer will have to pay tax on the interest payments. The employee cannot personally deduct the interest paid.
Original text: The Use of Deferred Compensation Funds – Part 2
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