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Under a split dollar plan, you have the opportunity to reward and retain your key employees.
- Collateral assignment / loan regime
- Endorsement split dollar / economic benefit regime
Let's explore the definitions of both.
Collateral assignment / loan regime
The employee owns the policy and the employer lends the premium required to pay for it. The employee is taxed on the interest-free element of the loan. When the employee leaves the company, the loan may be paid back by the employee or forgiven by the employer. If it is forgiven, there will be tax implications for the employee. And the employer will receive a tax deduction.
Endorsement split dollar / economic benefit regime
The company owns the life insurance policy. But allows the employee to name the beneficiary. When the employee leaves the company, the policy can be transferred to them. Or they can purchase it.
Employee and employer benefits
Now, let’s explore the shared benefits of both collateral assignment and endorsement split dollar plans.
Potential employer benefits
- You select who receives benefits, when they receive them and how much they receive
- Fewer limits or rules than traditional qualified plans
- Low start-up and administrative costs
- The chance to recoup your business’ investment when a valued employee quits, retires or dies
Potential employee benefits
- The employer pays the premiums for their life insurance
- They have flexibility in the plan design to meet their individual needs
- They may receive tax-free income through partial withdrawals and loans
- Opportunity for tax-deferred growth of cash values
Use Nationwide® Innovator Corporate Variable Universal Life to fund a split dollar plan.
Split dollar plan case study
Here's how it works. Check out this case study to see how split dollar plans can work for a business and its employees.
Read this important information
- The contract actually qualifies as life insurance according to Internal Revenue Code (IRC) Section 7702
- The contract is not a modified endowment contract, or MEC, as defined in IRC
- If it meets all of the requirements of Section 7702A, most of the distributions from your policy will be taxed on a first-in/first-out basis
- But, if it is a MEC, then any distributions you take from your policy will generally be taxable — and subject to a 10% penalty tax if you’re 59½ or younger
- If you choose to take loans or partial withdrawals, the death benefit payable to your beneficiaries will be reduced
- Surrender charges may apply to your partial withdrawals
Variable products are sold by prospectus. Carefully consider the investment objectives, risks, charges and expenses that may apply before investing. The prospectus contains this and other important information about the investment company. To request a copy, contact your investment professional or write to Nationwide Life Insurance Company, P.O. Box 182150, Columbus, OH 43218-2150. Please read the product and underlying fund prospectuses carefully before investing.