Participant Funded Split Dollar

IRC 7872-15: A Participant Funded Split Dollar plan from a regulatory perspective, matches that of traditional employer funded collateral assignment split dollar plan. What makes the structure different is the life insurance policy premiums, are funded by the executive either i) reducing salary, or ii) forgoing bonuses. This reduction/forgone amount is then used to pay premiums on the life insurance policy. The net effect to the employer is either cash-flow neutral, or an improvement to the bottom line as there may be a recoupment of payroll and excise tax costs. The executive’s forgone amount funds the premiums with pre-tax dollars, the life insurance policy values grow tax deferred, and if structured properly, the distributions are received tax-free. 

Under these arrangements, the employer retains the rights to the cash value and the death benefit up to the premiums paid by the employer, plus any accrued interest. The employee has rights to all cash values above the employer’s interest, and is 100% vested day 1. 

How It Works

In an employer sponsored voluntary participant funded split-dollar arrangement, the employer and the employee enter into an agreement, which describes how the death benefit is divided between each party, how each party can access the cash value (if applicable) and how each party can exit or terminate the agreement. Quite often, these plans either replace or complement 457(b) plans, due to all the limitations imposed on contribution amounts, and lack of penalty free liquidity.  


  • Regulations Sections 7872-15 and 61-22 of the Internal Revenue Code (the “Code”) govern these arrangements. 

Organization Perspective

  • Cost recovery of funds that would have otherwise been a sunk cost as cash compensation 

  • Recoupment of payroll costs 

  • May limit a compensation amount that would have otherwise caused an excise tax cost. Reducing an executive’s income via a salary reduction to less than or equal to $1 M, thus avoiding the 21% penalty 

  • Promotes stronger retention for key executives or employees 

Key Considerations

  • The owner of the policy

  • The split of premium payments (if any) to the life insurance company

  • The division of equity between the parties.

Executive Perspective

  • Unique structure that is virtually impossible to create elsewhere 

  • Funds go into the plan pre-tax, grow tax-deferred, and may be accessed tax-free

  • 100% vested day 1

  • May include a substantial death benefit for executive’s beneficiary 

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A Modern Approach to Executive Compensation & Retention

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Boston MA 02127