Continuing with our explanations of services we offer our clients brings us to split-dollar agreements. Below is a brief explanation of what split-dollar agreements are and how they can benefit your company.
Before getting into that, the following should be noted:
Note: this does not constitute legal advice. We work with competent legal professionals to design, develop and place split-dollar agreements for each of our clients that may need one. The following information is for informational purposes only.
What is a split-dollar agreement?
A split-dollar agreement is first and foremost a planning strategy of shared life insurance costs and benefits. It is a written contract signed by all parties involved—which tends to be employers and their employees. It isn’t, however, a type of life insurance policy, but what you do with life insurance policies that are already offered. There are multiple types of split-dollar agreements, but all are typically used only with permanent life insurance policies.
The most common uses of split dollar agreements are in business settings, often between employers and employees. These plans are non-qualified agreements, which means they’re not subject to most of the rules and regulations of the Employee Retirement Income Security Act of 1974 (ERISA). For businesses, this means that employers can discriminate over which employees are included in the agreement and which are not. Consequently, the most valuable employees can be selected to receive the benefits of these agreements.
How does a split-dollar agreement work?
There is more than one type of split dollar agreement. Some are owned and paid for by the company, while others are owned by the employee and paid by the employer. The basic idea, though, is that the death benefit, premium costs and cash surrender value of a permanent life insurance policy are split by the employer and employee. It provides a tax efficient way of providing benefits to key employees of a company.
In split-dollar agreements, a permanent life insurance policy is purchased. Within such a policy, the premiums paid go toward purchasing a death benefit; that death benefit is then guaranteed by the insurance company to pay as long as premiums are received. Along the way, a cash surrender value (which just means the amount of money the owner will receive if the policy is terminated) accrues.
The employer pays the premiums on the policy, and has access to the cash surrender value. If the employee dies while the agreement is in place, the death benefit is paid out; when structured a specific way, the employer receives back all premiums that were paid (though sometimes different) and the employee’s designated beneficiaries receive the rest of the death benefit amount. This makes the employer whole and the employee’s family receives a financial benefit at a tragic and critical time in their lives.
Who benefits from a split dollar agreement?
Just like most of these types of benefits, a split-dollar agreement benefits both the employer and the employee for several reasons. Below we’ve listed those benefits
Benefits to the employee
Insurance coverage- One of the biggest benefits to the employee is that he/she receives life insurance coverage during working years. That provides peace of mind for employees and their families.
Tax-free death benefits- Any death benefits paid out to beneficiaries are generally received income tax free.
Valued and included- Another important benefit to employees included in a split-dollar agreement is that they feel valued by the company. The company has specifically chosen them to receive the benefit.
Benefits to the employer
Cost recovery- If an employee dies, the employer is able to recover all premiums paid into the policy, while still providing the employee’s beneficiaries with the remaining death benefit.
Retain key employees- One of the most valuable reasons to implement a split-dollar plan is the retention power that it has. Employees see the value of the policy and want to remain at the company at least throughout the benefit period.
Adaptability- Since ERISA largely doesn’t apply, the plan can pretty much look however the employer wants it to look. Which means it can be customized to each business’s specific needs.
Why a split-dollar agreement for a construction company?
Like companies in all other industries, employees in the construction industry run risks just by working everyday; however, there are a few risks that many of the other industries don’t have.
The most obvious of which, we’ve mentioned in previous sections; construction employees are surrounded by heavy machinery, electrical wiring, suspended objects and so many more things. Even if they don’t work there on a daily basis (managers and executives), they often go to the work sites or monitor them. Now, we do acknowledge that many companies that technically fit in the industry don’t face these risks. But even if they don’t, there are specific risks each company faces that warrant taking a look at a split-dollar agreement.
The bottom line is that a business has the ability to cover risks that its employees face everyday. Not liability risks, in this case, but the risk of dying while working for that business (whether on the job or not). A company can use a split-dollar agreement to show its employees that it acknowledges risks and that it’s prepared to do everything it can to ensure its employees are taken care of. The business can feel good for putting it in place and the employee can have peace of mind knowing his/her family is taken care of as well.
