Split-Dollar + COLI/EOLI
Economic Benefit Regime Split-Dollar: Employer-Owned Arrangements Explained
Published October 9, 2026 · Updated October 9, 2026
Short Answer: What the Economic Benefit Regime Is
The economic benefit regime is the set of federal tax rules in Treas. Reg. § 1.61-22(d) through (g) for split-dollar arrangements where the employer owns the policy or is treated as owning it. The employee does not own the contract but is taxed each year on the value of the benefits the arrangement provides.
Business owners, finance leads and executives of closely held companies usually reach this question when a business wants to fund a death benefit for a key person while keeping its own stake in the policy. Business Life Insurance explains the rule here as one funding mechanism inside a broader executive-benefit plan.
Planning Objective: Why Employers Use This Structure
A closely held company often depends on a few people whose loss would disrupt clients, revenue and succession. The business may want to reward and retain those people with a meaningful benefit for their families, without giving up control of the asset that funds it.
Split-dollar life insurance addresses that problem by dividing one policy's values between two parties. The death benefit is split: a portion goes to the employee's chosen beneficiary, and the employer keeps its interest, often measured by the cash value (the contract's accumulated value) or the premiums it paid. Corporations, professional practices and other closely held businesses use the structure to provide a selective benefit to key personnel. The insurance is the funding mechanism; the plan is the retention and compensation arrangement written around it. The broader split-dollar regime overview explains how both regimes relate.
How the Structure Works: Ownership, Premiums and Benefits
Ownership decides the regime. Under Treas. Reg. § 1.61-22(b)(3)(ii)(A), the economic benefit rules apply, and § 1.7872-15 does not, to an arrangement entered into in connection with the performance of services when the employer is the owner of the contract or is treated as the owner. Under Treas. Reg. § 1.61-22(c)(1)(i), "the person named as the policy owner of such contract generally is the owner of such contract." The regulation adds a special rule in § 1.61-22(c)(1)(ii)(A)(1): an employer "is treated as the owner of a life insurance contract under a split-dollar life insurance arrangement that is entered into in connection with the performance of services if, at all times, the only economic benefit that will be provided under the arrangement is current life insurance protection."
In a typical arrangement, the steps run as follows:
- The employer applies for and owns the policy.
- The employer pays all or most of the premiums; the employee may pay nothing or a small share, by agreement.
- A written split-dollar agreement divides the death benefit, with the employer's interest reserved to it and the remainder payable to the employee's beneficiary.
- Under the endorsement method, the employer, as owner, endorses a portion of the death benefit to the employee's named beneficiary.
The collateral assignment method, where the employee owns the policy and the employer's premium payments are generally treated as loans, falls under the loan regime of Treas. Reg. § 1.7872-15. T.D. 9092 describes the two as "mutually exclusive regimes." "Equity" and "non-equity" split-dollar are industry labels, not terms the operative rules use to assign a regime.
Parties Involved: Employer, Employee and the Policy
Three parties hold distinct interests. The employer is the policy owner and premium payor; it holds the policy and its own share of the death benefit. The employee is the insured and the "non-owner" in the regulation's terms. Under Treas. Reg. § 1.61-22(d)(1), "economic benefits are treated as being provided to the non-owner," who takes them into account each year. The employee's personal beneficiary receives the employee's portion of the death benefit at the insured's death.
The arrangement is documented in a written agreement between employer and employee setting out each party's rights. It is a nonqualified arrangement: it is not a qualified retirement plan.
Who This Is For: Situations Where the Arrangement Arises
Economic benefit regime split-dollar arrangements commonly appear in:
- Closely held C corporations and S corporations providing selective death benefits to owner-employees or key executives.
- Professional practices, such as medical, dental, legal and accounting firms, organized as corporations. Professional-licensing rules on practice ownership vary by state.
- Employers that want to hold the policy and recover their premiums while funding a current death benefit for a valued employee.
- Employers seeking a nonqualified benefit that a qualified plan does not provide.
The arrangement is selective. It can cover one employee or a defined group without covering the whole workforce.
When It May Fit: Factual Conditions That Support This Approach
The structure is commonly considered when several facts line up:
- The employer wants to hold the policy and recover its premiums at the employee's death or when the arrangement ends.
- The employee's main need is a current death benefit for family, rather than policy ownership or access to cash value.
- The employer wants a selective, non-cash compensation element within a broader executive retention plan.
- The employer is prepared to calculate and report the employee's economic benefit every year through payroll.
Split-dollar regime, ownership and taxation need individual review of the contracts by the insurers involved and a qualified tax professional. Whether these facts are present, and whether the documents match them, turns on the actual agreement and policy.
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When It May Not Fit: Conditions That Limit Its Usefulness
Some facts point away from this structure. If the employee wants to own the policy or reach its cash value, the loan regime or an executive bonus arrangement is more often evaluated. An employer unwilling to handle annual valuation and reporting may find the administration burdensome.
Death-benefit rules also matter. Section 101(a)(1) of the Internal Revenue Code generally excludes from gross income amounts "paid by reason of the death of the insured," but limits apply, including two that matter here. A later transfer of the policy for valuable consideration can trigger the transfer-for-value cap in 26 U.S.C. § 101(a)(2), subject to the exceptions listed there. For an employer-owned contract, 26 U.S.C. § 101(j)(1) caps the employer's exclusion at "the sum of the premiums and other amounts paid by the policyholder for the contract" unless a § 101(j)(2) exception applies to a contract that meets the notice-and-consent requirements set out under Important Considerations below.
Cost also rises with age. The value of current protection generally increases as the insured gets older, so the employee's annual taxable amount tends to grow.
Tax Treatment: How the Economic Benefit Is Measured and Reported
Each year, Treas. Reg. § 1.61-22(d)(1) requires the non-owner to "take into account the full value of all economic benefits," "reduced by the consideration paid directly or indirectly by the non-owner to the owner." In an employer-employee setting, the regulation says the benefits may constitute "a payment of compensation."
Under § 1.61-22(d)(2), the value of the economic benefits for a taxable year equals:
- "The cost of current life insurance protection provided to the non-owner";
- "The amount of policy cash value to which the non-owner has current access" (to the extent not taken into account for a prior year); and
- "The value of any economic benefits not described" in the first two items (to the extent not taken into account for a prior year).
Under § 1.61-22(d)(3), the amount of current life insurance protection is the excess of the death benefit "over the total amount payable to the owner" under the arrangement, less the policy cash value already taken into account, and its cost is that amount "multiplied by the life insurance premium factor designated or permitted in guidance published in the Internal Revenue Bulletin." Notice 2002-8, Part III, gives interim guidance on valuing current life insurance protection. It states that "taxpayers may use the premium rate table set forth at the end of this notice" for arrangements entered into before the effective date of future guidance, and it captions that table Table 2001. Notice 2002-8 also states that for an arrangement entered into before January 28, 2002 whose contract provides for the older P.S. 58 rates, "the employer and employee may continue to use the P.S. 58 rates." Which rate applies to a given arrangement depends on its terms and dates. Under § 1.61-22(j), the section applies to an arrangement entered into after September 17, 2003, and an arrangement entered into on or before that date that is materially modified after it is treated as a new arrangement entered into on the date of the modification.
On premiums, 26 U.S.C. § 264(a)(1) provides that "No deduction shall be allowed for" premiums on a life insurance policy "if the taxpayer is directly or indirectly a beneficiary under the policy." An employer that keeps an interest in the death benefit is generally in that position, and the split-dollar regulation also generally denies the owner a deduction for premiums it pays. The regime-by-regime taxation page sets out further detail.
At death, the § 101(a)(1) exclusion is limited for employer-owned contracts by § 101(j), as described under Important Considerations. The business life insurance tax treatment page covers the death benefit in full.
Potential Advantages: What the Structure Provides
Several features of the structure follow directly from the ownership framework in Treas. Reg. § 1.61-22:
- The employer, as owner, holds the policy and its share of the death benefit and, under the agreement, may be entitled to recover premiums it paid from the policy's proceeds, one of the criteria in Treas. Reg. § 1.61-22(b)(1)(ii).
- The employee's beneficiary receives a death benefit without the employee paying the full premium; the employee is taxed instead on the annual economic benefit under § 1.61-22(d).
- Any amount the employee pays reduces the taxable economic benefit, under § 1.61-22(d)(1).
- The arrangement can be offered to one employee or a defined group.
- The agreement can provide for termination, for example at retirement or separation, after which the policy may be transferred to the employee. A transfer raises transfer-for-value and other tax questions that depend on its terms.
None of these features means a particular tax or financial outcome will follow for any business.
Important Considerations: Risks and Ongoing Obligations
Cost, compliance and documentation each carry ongoing weight. Because protection costs rise with age, the employee's annual taxable income from the arrangement generally grows over time. The employer values and reports that benefit as compensation every year.
For employer-owned contracts, 26 U.S.C. § 101(j)(4) requires that, "before the issuance of the contract," the employee be notified in writing of the intent to insure and the maximum face amount; give written consent, including to coverage continuing after employment ends; and be told in writing that the policyholder will be a beneficiary. Meeting these requirements does not by itself lift the § 101(j) cap, and neither does an exception by itself; both are needed. IRS Notice 2009-48, A-7, states that actual knowledge cannot substitute for written notice and consent, even for a wholly owned corporation and its employee-owner. Under 26 U.S.C. § 6039I, an applicable policyholder owning such contracts files an annual return and keeps records. The employer-owned life insurance rules page covers those requirements and exceptions.
A transfer of the policy at termination may implicate 26 U.S.C. § 101(a)(2). The arrangement is not a qualified plan. Insurance rules vary by state, and each insurer's forms, procedures and charges vary and are confirmed with that insurer.
Tax and Legal Coordination: What Professionals Review
Documentation drives the result. Professionals typically review the written split-dollar agreement, the policy's ownership and beneficiary designations, any endorsement, and how each matches the ownership rules in Treas. Reg. § 1.61-22(c). They also check the timing of the § 101(j)(4) notice and consent described above. Notice 2009-48, A-13, describes limited conditions under which the IRS will not challenge an inadvertent failure, and states that a missing written consent "cannot be corrected after the insured employee has died."
Payroll and tax processes also need to handle annual valuation and reporting of the economic benefit. Treas. Reg. § 1.61-22(b)(4) requires that the arrangement "be treated in the same manner by the owner and the non-owner" under either that section or § 1.7872-15, and that they "fully account for all amounts under the arrangement." Each item turns on the specific documents, under the individual review already noted.
Alternatives: Other Structures That Address Similar Objectives
Other structures serve similar goals, each with a different tax profile:
- Loan regime split-dollar. Under Treas. Reg. § 1.7872-15, the employee typically owns the policy and the employer's premium payments are treated as loans, with any below-market interest addressed under 26 U.S.C. § 7872.
- Executive bonus arrangement. The employer pays a bonus used for premiums on a policy the employee owns. The bonus is discussed as compensation under 26 U.S.C. § 162(a)(1), which allows "a reasonable allowance for salaries or other compensation," and is taxable to the employee; executive bonus tax treatment explains the employee side. "Section 162 plan" and "executive bonus plan" are industry shorthand for this bonus arrangement; section 162(a) is a deduction rule, and neither term is defined in the Code or regulations or describes a qualified retirement plan.
- Restricted executive bonus arrangement (REBA). An industry term, also undefined in the Code or regulations, for a bonus arrangement in which the employee's access to the policy is restricted by agreement.
- Corporate-owned life insurance without a split. The employer owns the policy and is its beneficiary, and § 101(j) may apply.
The choice among these structures depends on facts specific to each business.
Example (Hypothetical): Calculating the Annual Economic Benefit
This example is hypothetical. It uses an assumed rate chosen for illustration, not a published IRS or insurer rate.
Assumptions:
- The employer owns the policy under an endorsement arrangement.
- The insured employee is age 45 in year one and age 46 in year two.
- The employee's beneficiary's share of the death benefit is $500,000 both years.
- The employer pays the entire premium, and the employee pays nothing.
- The employee has no access to cash value, and no other benefits are provided.
- Assumed rate: $2.00 per $1,000 of protection at age 45 and $2.20 at age 46.
Year one:
- $500,000 ÷ $1,000 = 500 units of protection.
- 500 × $2.00 = $1,000 cost of current protection.
- $1,000 − $0 employee payment = $1,000 economic benefit.
Year two:
- 500 × $2.20 = $1,100.
- $1,100 − $0 = $1,100 economic benefit.
The amount rises by $100 because the assumed rate rises with age. An actual result depends on the rate that applies to the arrangement, the policy's terms and the agreement. This example is not a coverage recommendation.
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Frequently Asked Questions
What is the economic benefit regime in a split-dollar arrangement?
It is the set of federal tax rules in Treas. Reg. § 1.61-22(d) through (g) that apply when the employer owns the policy or is treated as owning it. The employee, as non-owner, takes into account each year the value of the economic benefits the arrangement provides.
How is the economic benefit calculated each year?
Under Treas. Reg. § 1.61-22(d)(2), it equals the cost of current life insurance protection, plus any cash value the employee can currently access and any other economic benefits, those last two to the extent not taken into account for a prior year. Amounts the employee pays toward those benefits reduce the total.
What is Table 2001 and where does it come from?
Table 2001 is the caption Notice 2002-8 gives the one-year term premium rate table printed at its end. The notice states that, for arrangements entered into before the effective date of future guidance, taxpayers may use that table to value current life insurance protection. Notice 2002-8 also lets certain arrangements entered into before January 28, 2002 continue using the older P.S. 58 rates where their contract provides for them.
What is the difference between the economic benefit regime and the loan regime?
The economic benefit regime generally applies when the employer owns the policy, and it taxes the employee on annual economic benefits. The loan regime under Treas. Reg. § 1.7872-15 generally applies when the employee owns the policy and the employer's premium payments are treated as loans. T.D. 9092 describes the two regimes as mutually exclusive.
What notice and consent requirements apply to employer-owned split-dollar policies?
Under 26 U.S.C. § 101(j)(4), the employee is notified in writing, gives written consent and is told in writing that the policyholder will be a beneficiary, all before the contract is issued. The exclusion cap is lifted only when those requirements are met and a § 101(j)(2) exception also applies.
What happens to the policy when a split-dollar arrangement ends?
The agreement's terms decide what happens; the policy may be kept by the employer, surrendered or transferred to the employee. Under Treas. Reg. § 1.61-22(g)(1), when the contract is transferred to the non-owner, the transferee takes into account the excess of the contract's fair market value over what the transferee pays for it and the cash value and other economic benefits already taken into account. A transfer for valuable consideration can also bring in the transfer-for-value limit of 26 U.S.C. § 101(a)(2), subject to its listed exceptions.
Is an economic benefit split-dollar arrangement a qualified retirement plan?
No. It is a nonqualified arrangement documented by a written agreement between employer and employee.
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.