Accounting for split-dollar life insurance depends entirely on who owns the policy. If the employer owns it (the endorsement method), the arrangement is taxed and booked under the IRS economic benefit regime: the employer carries the cash surrender value as an asset and records annual compensation expense, while the employee reports the value of insurance protection as W-2 income. If the employee owns it (the collateral assignment method), the arrangement falls under the loan regime: the employer’s premium advances are booked as a receivable, and any interest charged below the Applicable Federal Rate produces imputed interest income and matching compensation expense. Everything else in split-dollar life insurance accounting flows from that ownership question.
Identify the Regime Before Anything Else
Two structures, two regimes. Get this wrong and every entry downstream is wrong.
Under the endorsement method, the employer owns the policy outright, pays premiums directly to the insurer, and controls the cash surrender value. A written endorsement grants the employee a share of the death benefit. Because the employer is providing a current benefit rather than making a loan, Treasury Regulation §1.61-22 applies and the arrangement sits in the economic benefit regime.
Under the collateral assignment method, the employee owns the policy, names the beneficiary, and controls the contract. The employer advances the premiums and takes a collateral assignment of the policy’s cash value and enough of the death benefit to guarantee repayment. Those advances look like a loan secured by the policy, so Treasury Regulation §1.7872-15 applies and the arrangement sits in the loan regime.
The regulations do allow an arrangement that starts under the loan regime to convert to economic benefit when ownership transfers from employee to employer; the economic benefit rules apply from the date of transfer and prior premium advances are no longer treated as split-dollar loans going forward.1Department of the Treasury. Split-Dollar Life Insurance Arrangements – Final Regulations The reverse move is not contemplated, so choosing the right structure at inception matters more than trying to fix it later.
Economic Benefit Regime: Employer-Owned Policies
On the Employer’s Books
The employer records an asset equal to the policy’s cash surrender value, capped at the amount it expects to recover. Under FASB guidance (ASC 325-30, derived from Technical Bulletin 85-4), cash surrender value is the standard measurement for company-owned life insurance. The difference between premiums paid in a given year and the change in cash surrender value flows through the income statement.
The employer also books a compensation expense each year equal to the economic benefit provided to the employee. When cash surrender value grows faster than cumulative premiums, that growth partially offsets the compensation expense over time.
If the arrangement provides a post-retirement death benefit, ASC 715-60 requires the employer to accrue a liability for that future obligation during the employee’s working years, similar to other post-retirement benefit promises.
On the Employee’s W-2
The employee owes income tax each year on the cost of the life insurance protection the employer is providing, even without writing a check. That cost equals the death benefit payable to the employee’s personal beneficiary (not the portion the employer will recoup), multiplied by the lower of the appropriate Table 2001 rate or the insurer’s own published one-year term rates.2Internal Revenue Service. Notice 2001-10 The insurer’s rates qualify only if they are available to all applicants in standard health, not just to plan participants.
The employee must also report any policy cash value the employee can currently access, plus any other economic benefits the arrangement provides.3eCFR. 26 CFR 1.61-22 – Taxation of Split-Dollar Life Insurance Arrangements These amounts appear as non-cash compensation on Form W-2.
Retirement does not stop this. As long as the policy stays in force and the former employee keeps a beneficial interest, the economic benefit calculation continues, and because Table 2001 rates climb steeply with age, the annual inclusion can grow substantially for older retirees. Many arrangements build in a termination point or a rollout provision at retirement for exactly this reason.
Loan Regime: Employee-Owned Policies
On the Employer’s Books
Each premium advance is booked as a receivable, essentially a note due from the employee. Classification depends on maturity: due within a year, it’s a current asset; longer, it sits in long-term receivables.
Interest is where the accounting gets interesting. The IRS publishes Applicable Federal Rates each month in short-term, mid-term, and long-term buckets.4Internal Revenue Service. Applicable Federal Rates If the split-dollar loan charges interest below the relevant AFR, Section 7872 treats the shortfall as forgone interest.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates
For GAAP, the employer must recognize both interest income (as if the full AFR were being charged) and a matching compensation expense (representing the value of the below-market rate the employee is enjoying). The net effect on net income is often a wash, but each component has to land in the right line.
On the Employee’s Return
Premium advances themselves are not taxable income to the employee. Receiving a loan is not compensation, and that deferral is the main draw of the collateral assignment structure. But if the loan carries interest below the AFR, the employee recognizes the forgone interest amount as taxable compensation.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates The mechanics treat it as though the employer paid extra compensation and the employee immediately paid it back as interest.
Documentation Is the Whole Ballgame
Loan-regime arrangements hold up or fall apart on their documentation. To sustain loan treatment, the parties need a written promissory note with a genuine, unconditional repayment obligation, typically triggered by a fixed maturity date, termination of employment, or the employee’s death. Both borrower and lender must sign a written representation that a reasonable person would expect all payments to be made.6eCFR. 26 CFR 1.7872-15 – Split-Dollar Loans
If the documentation is thin or the repayment obligation looks illusory, the IRS can recharacterize the entire premium payment as current taxable compensation. That collapses the loan structure retroactively and forces the employee to include the full premium in gross income for the year it was paid. The policy’s cash surrender value must also be sufficient collateral to make the repayment expectation credible; a policy heavily borrowed against may fail that test.
What Happens When the Arrangement Ends
Split-dollar arrangements terminate through retirement, employment ending, or a planned rollout. If the employer transfers the policy to the employee (or the employee’s trust), the employee recognizes income equal to the excess of the policy’s fair market value over two items: what the employee pays the employer for the contract, and the cumulative economic benefits the employee has already been taxed on.3eCFR. 26 CFR 1.61-22 – Taxation of Split-Dollar Life Insurance Arrangements Fair market value here means the cash value plus all other contract rights, excluding the value of current life insurance protection.
Years of accumulated cash value can trigger a large income event at rollout. Clients who have not planned for it are often blindsided. If the transfer is connected to services and the policy is still subject to a substantial risk of forfeiture, Section 83 delays income recognition until the policy vests. After transfer, the former non-owner is the policy owner for all federal tax purposes going forward.
Financial Statement Presentation and Disclosure
Under the economic benefit regime, the balance sheet carries a non-current asset at the policy’s cash surrender value, offset by any accrued post-retirement benefit liability if the death benefit continues past retirement. The income statement shows annual compensation expense for the economic benefit provided.
Under the loan regime, the balance sheet carries a note receivable classified by maturity. The income statement shows interest income (stated or imputed) and, for below-market loans, a matching compensation expense for the forgone interest. Changes in cash surrender value on any COLI held flow through the income statement as an adjustment to the COLI asset.
Footnote disclosures cover the nature of the arrangement (loan or economic benefit) and several specifics:
- Asset or receivable amount recorded on the balance sheet
- Aggregate policy face amount
- Method used for the benefit calculation (Table 2001 or insurer rates)
- Loan terms, including repayment triggers, stated interest rates, and whether the AFR was used for imputation
- Any accrued post-retirement obligation under ASC 715-60
Two Boundaries Worth Knowing
Public company executives cannot use the collateral assignment structure. Section 402 of Sarbanes-Oxley, codified at 15 U.S.C. §78m(k), makes it illegal for any publicly traded company to extend, maintain, or arrange personal loans to directors or executive officers.7Office of the Law Revision Counsel. 15 USC 78m – Periodical and Other Reports Because premium advances are treated as loans, that effectively rules out the loan regime for covered executives. Loans existing before July 30, 2002, are grandfathered unless materially modified or renewed. The prohibition reaches beyond the CEO to the principal financial officer, principal accounting officer, any vice president over a principal business unit, and anyone performing equivalent functions. Private companies are not subject to SOX and may use either structure.
ERISA reporting rarely bites. When a split-dollar arrangement is part of a broader employee death benefit plan, it can be a welfare benefit plan under ERISA, and the Department of Labor has confirmed that fiduciary standards apply to the selection and retention of the underlying policy.8U.S. Department of Labor. Advisory Opinion 1992-22A But welfare benefit plans covering fewer than 100 participants that are unfunded or fully insured are generally exempt from filing Form 5500.9Department of Labor. 2025 Instructions for Form 5500 Most split-dollar arrangements cover a handful of executives and fall well below that threshold.