Split-Dollar + COLI/EOLI
How Split-Dollar Life Insurance Is Taxed Under Each Regime
Split-dollar life insurance is generally taxed under one of two federal regimes, and which one applies depends on who owns the policy. Under the economic benefit regime, the person who does not own the policy is generally taxed each year on the value of the life insurance protection and other benefits received. Under the loan regime, qualifying payments are treated as loans, and below-market interest can be imputed.
Published October 8, 2026 · Updated October 9, 2026
Technical summary / key takeaways
- Under the economic benefit regime, the non-owner's annual benefit includes "the cost of current life insurance protection," measured with a premium factor the IRS designates or permits in published guidance (26 C.F.R. § 1.61-22(d)(2)-(3)).
- Under the loan regime, a below-market split-dollar loan is taxed under section 7872, and the character of the imputed amounts "depends upon the relationship" between the parties (26 C.F.R. § 1.7872-15(e)(1)).
- The regimes are mutually exclusive, and the regime follows the ownership structure and terms of the arrangement, not the label the parties choose.
- Under the economic benefit regime, a beneficiary other than the owner excludes the death benefit under section 101(a) only to the extent it is allocable to current protection the non-owner paid for or took into income.
- "Equity split-dollar" and "non-equity split-dollar" are industry labels; the Treasury Regulations do not use them as defined categories.
- The date an arrangement was entered into, and any later change to it, can decide which body of rules applies.
The question usually comes from a closely held company, an owner-employee or an executive whose business pays some or all of the premiums on a policy while the other party shares the death benefit or the cash value. Treasury Regulation § 1.61-22 governs the economic benefit side and § 1.7872-15 governs split-dollar loans; T.D. 9092 describes the two as "mutually exclusive regimes." The ownership and structure of the arrangement decide which one applies. Section 1.61-22(j)(1)(i) applies to arrangements "entered into after September 17, 2003"; older arrangements may rest on earlier guidance, including Notice 2002-8. How the regime, ownership and taxation work out for a particular arrangement depends on an individual review of the contracts involved by the insurers and a qualified tax professional.
What Split-Dollar Life Insurance Means for Tax Purposes
The operative definition sits in the regulations. Treasury Regulation § 1.61-22(b)(1) describes "any arrangement between an owner and a non-owner of a life insurance contract" in which:
- either party pays, directly or indirectly, all or part of the premiums, including "by means of a loan to the other party that is secured by the life insurance contract";
- at least one paying party "is entitled to recover (either conditionally or unconditionally) all or any portion of those premiums," with recovery made from, or secured by, the policy proceeds; and
- the arrangement is not part of a group-term life insurance plan, unless that plan provides permanent benefits.
Under § 1.61-22(b)(2), two kinds of arrangement are treated as split-dollar even if those criteria are not met: compensatory arrangements and shareholder arrangements. In business terms, the policy is the funding mechanism for a benefit promise, such as an executive death benefit, while the business recovers its outlay. The general structure is set out in the overview of split-dollar life insurance.
Two ownership patterns appear in practice. In one, the business owns the policy and the other party receives benefits from it. In the other, the individual owns the policy and the business funds the premiums. Industry usage describes how cash value is shared with the terms "equity" and "non-equity"; their meaning is covered in the FAQ below. This page addresses federal income tax only. Contract terms vary by insurer, and state insurance rules vary by state.
The Federal Rules That Govern Split-Dollar Taxation
Several authorities work together:
- 26 C.F.R. § 1.61-22. Its overview states that paragraph (b) "provides rules to determine whether an arrangement is subject to the rules of paragraphs (d) through (g) of this section, § 1.7872-15, or general tax rules." Paragraph (d) taxes economic benefits, and paragraph (f) covers additional consequences, "including the treatment of death benefit proceeds."
- 26 C.F.R. § 1.7872-15. This section governs split-dollar loans, including below-market split-dollar loans.
- 26 U.S.C. § 7872. This section treats forgone interest on certain below-market loans as transferred from lender to borrower and "retransferred by the borrower to the lender as interest."
- 26 U.S.C. § 101(a)(1). This provision excludes from gross income amounts "paid by reason of the death of the insured," subject to listed exceptions.
- 26 U.S.C. § 101(a)(2). The transfer-for-value rule limits that exclusion after a transfer "for a valuable consideration."
- T.D. 9092. This Treasury Decision published the final split-dollar regulations.
- Notice 2002-8. This notice addresses the valuation of current life insurance protection, including relief for certain arrangements entered into before January 28, 2002.
Requirements for Each Regime
The regime turns on ownership and structure. Under § 1.61-22(b)(3)(ii), the economic benefit rules in paragraphs (d) through (g) apply, and § 1.7872-15 does not, to an arrangement entered into in connection with the performance of services where the employer or service recipient is the owner of the contract. Under § 1.61-22(b)(3)(i), § 1.7872-15 applies to a split-dollar loan: a payment made directly or indirectly by the non-owner to the owner that is a loan under general principles of federal tax law, or that a reasonable person would expect to be repaid in full, with repayment to be made from, or secured by, the policy's death benefit proceeds, cash surrender value, or both (§ 1.7872-15(a)(2)(i)). A non-owner premium payment that is neither a split-dollar loan nor consideration for economic benefits is subject to "general income tax, employment tax, self-employment tax, and gift tax principles" (§ 1.61-22(b)(5)).
The economic benefit regime values three items for each taxable year under § 1.61-22(d)(2):
- the cost of current life insurance protection;
- "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
- any other economic benefits, to the extent not previously taken into account.
The loan regime applies § 7872 to below-market split-dollar loans "enumerated under section 7872(c)(1), which include gift loans, compensation-related loans, and corporation-shareholder loans" (§ 1.7872-15(e)(1)(i)). A loan not on that list is "a significant-effect loan under section 7872(c)(1)(E)" (§ 1.7872-15(e)(1)(ii)). Section 1.7872-15(a)(3) provides that "section 7872 is applied to a split-dollar loan without regard to the de minimis exceptions in section 7872(c)(2) and (3)." Whether a later change to an existing arrangement moves it under different rules is a fact-specific question.
How the Economic Benefit and Loan Regimes Work
Economic benefit regime
Section 1.61-22(d)(3)(i) defines the amount of current protection as the death benefit, including paid-up additions, minus the total amount payable to the owner, including offsetting policy loans. That amount is further reduced by any cash value the non-owner has already taken into account or paid for. Under § 1.61-22(d)(3)(ii), the cost equals that amount "multiplied by the life insurance premium factor designated or permitted in guidance published in the Internal Revenue Bulletin." Under § 1.61-22(f)(2)(ii), any amount the non-owner pays the owner for these benefits is included in the owner's gross income.
The death benefit follows an allocation rule in § 1.61-22(f)(3). A beneficiary other than the owner excludes proceeds under section 101(a) "to the extent such amount is allocable to current life insurance protection provided to the non-owner pursuant to the split-dollar life insurance arrangement, the cost of which was paid by the non-owner, or the value of which the non-owner actually took into account." The owner excludes, as beneficiary, the portion not so allocable.
Loan regime
Here the business acts as lender. Under § 1.7872-15(e)(1)(i), "if the lender is the borrower's employer, the split-dollar loan is generally a compensation-related loan, and any imputed transfer from the lender to the borrower is generally a payment of compensation." Section 1274(d) directs the Secretary to determine each month the federal short-term, mid-term and long-term rates that apply during the following month. Under section 7872(e)(1), a demand loan is a below-market loan when interest is payable at a rate less than the applicable Federal rate, and a term loan is one when the amount loaned exceeds the present value of all payments due under the loan. Under § 1.7872-15(a)(2)(i), the repayment is to be made from, or is secured by, the policy's death benefit proceeds, cash surrender value, or both.
Deductions and corporation-shareholder arrangements
Section 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." The regulations also reach corporation-shareholder arrangements, both as shareholder arrangements under § 1.61-22(b)(2)(iii) and as corporation-shareholder loans under § 1.7872-15(e). Their consequences can differ from those of employer-employee arrangements because the character of the imputed amounts follows the relationship between the parties.
Who Uses Split-Dollar Arrangements in a Business Context
Typical users are closely held corporations that fund a death benefit for a key employee or an owner-employee while keeping a right to recover the premiums. Other arrangements are entered into between a corporation and a shareholder who share the cost and benefit of one policy. Still others provide an executive with protection, cash value access, or both, while the employer's outlay is secured by the contract. Each is a business problem first: retaining a key person, rewarding an owner-employee, or keeping company money recoverable. The policy is only the funding mechanism within that plan. The roles of owner, insured and beneficiary shape every result.
Split-dollar differs from the industry arrangement called an executive bonus plan, which is not a qualified plan or a Code-defined term; its taxation is covered separately. This page is for business owners, executives, HR and finance leads, and their advisers who want to understand the federal framework. It does not replace a review of the documents involved.
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When the Regulations Apply
The regulations apply only to arrangements that meet the definition in § 1.61-22(b). That means an owner and a non-owner, a premium payment by either party, and a right of recovery from or secured by the proceeds. Two kinds of arrangement are covered even when those elements are missing:
- Compensatory arrangements, under § 1.61-22(b)(2)(ii). These are entered into "in connection with the performance of services," the employer or service recipient pays premiums, and either the beneficiary of any portion of the death benefit is designated by the service provider (or is a person the service provider would reasonably be expected to designate) or the service provider "has any interest in the policy cash value."
- Shareholder arrangements, under § 1.61-22(b)(2)(iii). These are entered into between a corporation and another person in that person's capacity as a shareholder, the corporation pays all or any portion of the premiums, and either the beneficiary of any portion of the death benefit is designated by the shareholder (or is a person the shareholder would reasonably be expected to designate) or the shareholder has any interest in the policy cash value.
Timing matters for older arrangements. Notice 2002-8 provides that, for an arrangement "entered into before January 28, 2002," in which an employer-employee contract provides that P.S. 58 rates will value current protection, the parties "may continue to use the P.S. 58 rates" to determine the value of current protection. Under § 1.61-22(j)(2)(i), an arrangement entered into on or before September 17, 2003 that is "materially modified after September 17, 2003" is treated as a new arrangement entered into on the date of the modification, and § 1.7872-15(n) uses the same dates for the loan rules.
When the Split-Dollar Tax Rules May Not Apply or May Apply Differently
Several situations depart from the standard analysis:
- Arrangements outside the definition. An arrangement that falls outside § 1.61-22(b) is generally taxed under general tax rules (§ 1.61-22(a)(1), (b)(5)).
- Transfers for value. Section 101(a)(2) limits the exclusion after a transfer for value to "the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee." Section 101(a)(2)(B) excepts transfers "to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer." A policy that moves at the end of an arrangement raises the question; a transfer to the insured is one of the transferees named in section 101(a)(2)(B). Partner ownership structures raise related questions.
- Employer-owned contracts. For an employer-owned life insurance contract, section 101(j)(1) caps the excluded amount at "the sum of the premiums and other amounts paid by the policyholder for the contract." Under section 101(j)(3)(A), that is a life insurance contract owned by a person engaged in a trade or business under which that person (or a related person) is directly or indirectly a beneficiary, and that covers the life of an insured who is an employee with respect to the trade or business of the applicable policyholder on the date the contract is issued. Notice 2009-48 states that section 101(j) applies to contracts issued after August 17, 2006, except for a contract issued after that date in a section 1035 exchange for a contract issued on or before that date. Under section 101(j)(2), the cap does not apply to the listed amounts (based on the insured's status or on amounts paid to the insured's heirs), and only where the notice and consent requirements of section 101(j)(4) were met "before the issuance of the contract." Notice 2009-48 A-1 says a contract owned by an owner of the entity, rather than by the business, is not an employer-owned contract.
- Estate and gift tax. These questions fall outside this page. Estate liquidity for a business interest is covered under business succession funding.
Compliance Considerations for Split-Dollar Arrangements
Ongoing administration is where these rules are met or missed. Under the economic benefit regime, the value under § 1.61-22(d) is determined for each taxable year. Depending on the relationship between the owner and the non-owner, the economic benefits may constitute a payment of compensation, a distribution under section 301, a contribution to capital, a gift, or a transfer having a different tax character (§ 1.61-22(d)(1)). Under the loan regime, loan terms such as the stated interest and the repayment provisions determine whether § 7872 imputes interest. Section 1.61-22(b)(4) requires the owner and the non-owner to treat the arrangement "in the same manner" under either that section or § 1.7872-15, and to fully account for all amounts under the arrangement.
For employer-owned contracts, Notice 2009-48 A-7 states that section 101(j)(4) gives no exception for "a wholly-owned corporation and its employee-owner." It adds that "actual knowledge alone" cannot substitute for written notice and consent. Notice 2009-48 A-13 describes limited relief for an inadvertent failure: a good-faith effort, inadvertence, and correction by the due date of the return for the year the contract was issued. It adds that missing consent "cannot be corrected after the insured employee has died." Section 101(j) notice and consent, the related Form 8925 reporting, any transfer for value at rollout, estate and gift tax questions, and the history of an older or amended arrangement are all part of the individual review of the contracts involved by the insurers and a qualified tax professional.
Common Errors in Split-Dollar Tax Treatment
Treating the label as the rule is one source of error. Points that are easy to get wrong include:
- Choosing a regime by the parties' label instead of by ownership and structure.
- Omitting the annual economic benefit from the non-owner's income.
- Valuing protection with a factor the IRS has not designated or permitted under § 1.61-22(d)(3)(ii).
- Overlooking cash value access under § 1.61-22(d)(2)(ii).
- Assuming an older arrangement is governed by the final rules, or by the transition rules, without checking its history.
- Assuming a full death benefit exclusion. In fact, the § 1.61-22(f)(3) allocation and section 101(a)(2) both limit it.
- Ignoring section 101(j) where a contract meets the employer-owned definition in section 101(j)(3).
- Treating "equity" or "non-equity" as categories with defined tax results.
- Documenting the arrangement in a way that does not match the regime from its start.
Hypothetical Example: Economic Benefit Regime vs. Loan Regime
This example is hypothetical. It uses round figures and assumed rates chosen for arithmetic only; they are not published IRS rates.
Assumptions:
- Death benefit: $1,000,000.
- Premium: $20,000, paid by the employer in year one.
- The employer is entitled to recover the premiums it pays.
- Insured: an employee aged 50.
- Assumed premium factor: $2 per $1,000 of protection.
- Assumed applicable Federal rate: 4%, applied to the balance for one full year. For a demand loan the rate is the Federal short-term rate, compounded semiannually (§ 7872(f)(2)(B)); this example ignores the compounding.
- The loan is treated as a demand loan and bears no interest.
Economic benefit regime (the employer owns the policy):
- Amount payable to the owner: $20,000.
- Current protection: $1,000,000 − $20,000 = $980,000, assuming no policy cash value has been taken into account or paid for by the employee.
- Units of $1,000: $980,000 ÷ $1,000 = 980.
- Cost of protection: 980 × $2 = $1,960, which the employee includes in income for the year.
Loan regime (the employee owns the policy):
- Loan balance: $20,000, outstanding for the full year. Under § 1.7872-15(a)(3), section 7872 is applied to a split-dollar loan without regard to the de minimis exceptions in section 7872(c)(2) and (3).
- Forgone interest: $20,000 × 4% = $800.
- Under § 7872(a)(1), the $800 is treated as transferred to the employee, generally as compensation, and then retransferred to the employer as interest income.
Actual amounts depend on the contract, the insured's age, the rates published for the relevant period, the loan terms and other facts. The example does not show any reader's result.
Professional Coordination for Split-Dollar Arrangements
No single discipline covers the whole arrangement. Each professional typically handles a different part:
- A tax professional typically identifies the regime, computes annual inclusions or imputed interest, and checks any transition rules.
- Legal counsel typically drafts or reviews the agreement so that ownership, premium sharing and rollout terms match the intended regime.
- The insurers involved confirm the policy's ownership, beneficiary designations, any insurer rates used and the contract terms. Insurer forms and procedures vary from insurer to insurer.
- Tax, legal and HR functions together coordinate the section 101(j) notice and consent and the Form 8925 reporting where an employer-owned contract is involved.
Business Life Insurance provides general educational information. It is not a tax, legal, insurance or financial adviser.
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We're your trusted California business life insurance advisor. Call us 7 days a week, or send us a message, to have a real conversation about what your business needs.
Frequently Asked Questions
What determines whether the economic benefit regime or the loan regime applies to a split-dollar arrangement?
Ownership and structure determine it. Treasury Regulation § 1.61-22(b) sets the rules for whether an arrangement falls under the economic benefit provisions, under § 1.7872-15 or under general tax rules. T.D. 9092 calls the two regimes mutually exclusive. The label the parties give the arrangement does not decide the regime.
What does the employee include in income each year under the economic benefit regime?
The employee includes the cost of current life insurance protection, measured with an IRS-designated or IRS-permitted premium factor. The employee also includes the policy cash value to which they have current access and the value of any other economic benefits, in each case to the extent not taken into account for a prior taxable year (26 C.F.R. § 1.61-22(d)(2)).
How is the death benefit taxed under a split-dollar arrangement?
Under the economic benefit regime, a beneficiary other than the owner excludes proceeds under section 101(a) only to the extent they are allocable to protection the non-owner paid for or took into income. Under either regime, the transfer-for-value rule in section 101(a)(2) can limit the exclusion. For employer-owned contracts, so can section 101(j).
What is the difference between "equity split-dollar" and "non-equity split-dollar"?
Both are industry labels, not regulatory terms. "Equity" usually describes an arrangement in which the non-owner shares in cash value beyond the owner's recovery. "Non-equity" usually describes one in which the non-owner's interest is limited to protection. The tax analysis follows the regulatory regime, not the label.
Does the loan regime require the employee to pay interest on the premium loans?
That depends on whether the loan is below market. Under § 1.7872-15(a)(1), a split-dollar loan that is a below-market loan is governed by section 7872, which imputes forgone interest; a loan that is not a below-market loan is governed by the general rules for debt instruments. Under § 1.7872-15(e), when the lender is the employer, the imputed transfer is generally compensation, and the retransfer is treated as interest to the employer.
What is the transfer-for-value rule and when does it matter in a split-dollar arrangement?
Section 101(a)(2) generally caps the exclusion after a transfer for value at the consideration paid plus the premiums the transferee pays afterward. The rule can matter when a policy changes hands at rollout. The exceptions in section 101(a)(2)(B) depend on the parties' relationship.
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.