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  • Writer's pictureJay Judas

Tier One: Pay Me In Life Insurance!

Since the enactment of IRC §4960 as part of the Tax Cuts & Jobs Act of 2017, tax-exempt organizations have been subject to an excise tax equal to 21% of taxable compensation above $1 million or excess parachute payments paid to certain highly compensated employees, a sum that is not adjusted for inflation. As a result, many tax-exempt organizations, including colleges and universities, have increasingly been employing split-dollar life insurance arrangements as alternatives to traditional non-qualified deferred compensation plans subject to §457(f) or other forms of taxable compensation.

At colleges and universities, the need to pay head coaches of major football and basketball programs salaries far in excess of $1 million makes incorporating split-dollar into compensation programs attractive. Here is the growing list of schools and coaches who have entered split-dollar arrangements as part of recent pay packages:

  • Jim Harbaugh, University of Michigan: $4 million premium loan in 2016 and $2 million a year for each of the next five years.

  • Dabo Swinney, Clemson: $1 million premium loan in 2019.

  • Ed Orgeron, LSU: $2.5 million premium loan in 2020 and another $2.5 million premium loan in 2021.

  • James Franklin, Penn State: Starting in 2021, $1 million premium loan a year for 10 years.

  • Dawn Staley, South Carolina: Starting in 2018, $300,000 premium loan a year for five years.

Split dollar is a strategy that allows the disproportionate sharing of the cost and benefits of a permanent life insurance policy. The premium loans made to the employee accumulate cash value in a policy which can later be accessed in retirement tax-free as withdrawals and/or loans from the policy. The tax-exempt employer recovers its loans, plus any accrued interest, from the death benefit and any remaining death benefit proceeds are paid to the employee’s beneficiaries.

To Whom Does the Excise Tax Apply

There are some specifics about who is covered by the excise tax at a tax-exempt organization. The definition under §4960 comprises more than officers and includes a current or former employee who is or was among the five highest paid in a tax year beginning after December 31, 2016. Once an employee is determined to be a covered employee, he or she will always be considered a covered employee. This means the excise tax can very well end up being applied to more than just five employees after the first year.

What Organizations are Impacted by the Excise Tax?

When it comes to avoiding the excise tax, the use of split-dollar arrangements is not limited to universities and coaches. Applicable tax-exempt organizations are those which are exempt under §501(a) as well as §501(c)(3), including not only colleges and universities but also hospitals. Health maintenance organizations and other social welfare organizations exempt under §501(c)(4) and agricultural [§501(c)(5)], chambers of commerce, real estate boards and professional sports leagues [§501(c)(6)] also apply.

How does the IRS feel about Split Dollar?

On June 11, 2020, the Treasury Department and the IRS released detailed proposed rules (the “Proposed Regulations”) interpreting §4960 of the IRC. The Proposed Regulations provide additional detail about the tax penalties on tax-exempt employers and entities treated as related to those organization paying certain employees remuneration in excess of $1 million or excess payments contingent upon an employer’s separation from employment.

The most helpful parts of the proposed regulations is in defining who is, or is not, a covered employee, which included a number of exemptions, what is or is not an Applicable Tax Exempt Organization and what is and is not considered remuneration subject to the excise tax.

The Proposed Regulations touched upon the use split-dollar arrangements as it pertains to the §4960 excise tax. The regulations provide that imputed interest on a below-market split-dollar loan (where the insurance arrangement is structured using the loan approach) is treated as remuneration under these rules, even though there is no federal tax withholding on the interest.

Until, and if, final regulations are issued, an organization may rely on these proposed regulations, or the organization may adopt its own reasonable, good faith interpretation of the statutory rules.


Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at


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