A collection of insightful and informative articles from Myerson Wealth's “Recipes for Success” newsletter
Split-Dollar Life Insurance: A Winning Game Plan for Non-Profits and Their Executives
Fall is in full swing, and with it comes endless matchups, broadcasts and reruns of much of America’s favorite sport: football. If you know me, you know that real football is my favorite sport, but nonetheless, it’s undeniably football season in America—albeit a “different” kind of season due to the pandemic.
While many NFL teams are owned by individual billionaires, NCAA football programs are contrastingly owned by their respective colleges and universities. The significance lies in the fact that any public educational institution is a non-profit organization – and therefore must compensate its employees in accordance with non-profit regulations and tax code. So, how can non-profits pay their top executives (and in this case, coaches) the competitive salaries they demand? Enter split-dollar life insurance strategies.
How Split-Dollar Life Insurance Works
Split-dollar life insurance plans are most common between businesses and their employees, or corporations and their shareholders. The plan is not an insurance product, but a written agreement that outlines how both parties will share the costs and benefits of a permanent life insurance policy – including premiums, accumulation of cash value, and death benefit. Within this same agreement, the employer commits an interest-free loan to its employee over a specified period of time – often seven years. The policy within the arrangement charges the highest premium for the lowest amount of death benefit to grow the cash value as quickly as possible while incurring the least amount of charges. The loan is eventually repaid to the employer – either through the policy’s cash value or from the employee’s death benefit. Certain policies may be engineered to provide the employee additional features, such as access to the plan’s cash value (over the amount of the loans) income tax-free.
Jim Harbaugh and His 2016 Contract
I’m not much of a Michigan Wolverines fan myself, but one would be remiss to discuss split-dollar without highlighting the unprecedented case that made headlines in 2016. Before leading his team to a 10-3 season, Wolverines head coach Jim Harbaugh agreed to a split-dollar life insurance arrangement in lieu of deferred compensation. The plan established that the University of Michigan would loan a total of $14 million to Harbaugh in annual installments over the course of seven years. As that money would be invested into a cash accumulation life insurance policy, Harbaugh could access that money income tax-free. His particular arrangement stipulates that he must be employed by Michigan at the time of each scheduled advance, but he is not obligated to pay back the previous premiums immediately in the event that he would accept another job elsewhere. He pays tax annually on imputed income because the term of the loan is equal to the duration of his lifetime. Therefore, the loan is repayable upon his death, or sooner, upon his choosing.
Although split-dollar plans have existed for many years, this unprecedented arrangement within the NCAA kicked off a trend at other schools. Clemson and LSU’s football programs, as well as South Carolina’s women’s basketball program, have since followed suit for their head coaches’ compensation.
2018 Tax Code Change
In 2018, the Tax Cuts and Jobs Act imposed a 21 percent excise tax on non-profit organizations where its top executives earned salaries in excess of $1 million. As a result, non-profits must revisit how they structure compensation packages to attract top talent and avoid falling subject to the onerous tax on their employees’ earnings. Because of this, we can expect to see many more contracts like Harbaugh’s – both on the field and in C-suites across the nation.
If you are sorting through a split-dollar plan, or wondering if the strategy may be appropriate for a client, non-profit or employee, contact Myerson Wealth. We’re happy to answer your outstanding questions and determine if split-dollar life insurance may be a solution.