Endorsement Split Dollar Agreement: What is it and How Does it Work?
Endorsement Split Dollar Agreement (ESDA) is a type of life insurance policy that allows businesses to provide life insurance coverage to their employees and executives. It is a tax-advantaged arrangement in which the company and the employee share the premiums and the death benefits of the policy. The ESDA is a win-win situation for both parties as it provides valuable protection for the employee and tax savings for the company.
How Does the Endorsement Split Dollar Agreement Work?
In an ESDA, the company and the employee agree to split the premium payments and the death benefit of the policy. The company pays a portion of the premium, usually the cost of the pure insurance, and the employee pays the remaining portion, which is the difference between the total premium and the pure insurance cost. The employee can choose to assign the policy to the company as collateral for the premium payments or keep it as a personal asset.
The death benefit of the policy is also split between the company and the employee. The company receives the portion of the death benefit equal to the amount of the premiums it paid plus interest, and the employee receives the remaining death benefit.
The ESDA is usually structured as a loan from the company to the employee to pay for the policy, with the interest rate set by the IRS. The employee repays the loan with interest over time, either through payroll deductions or out-of-pocket payments. When the employee dies, the death benefit pays off the remaining loan balance, and the remaining benefit goes to the employee`s beneficiaries.
Benefits of the Endorsement Split Dollar Agreement
The ESDA has several benefits for both the employer and the employee. For the employer, it provides tax savings as the cost of the pure insurance paid by the company is tax-deductible. It also allows the employer to offer valuable life insurance coverage to employees and executives as a benefit, increasing retention and morale.
For the employee, the ESDA provides valuable life insurance coverage at a lower cost, as the premiums are split between the employee and the company. The employee also maintains some control over the policy and can assign it as collateral to the employer or keep it as a personal asset.
Conclusion
The Endorsement Split Dollar Agreement is a valuable tool for businesses to provide life insurance coverage to their employees and executives while also saving on taxes. It is a win-win situation for both parties, as it provides valuable protection for the employee and tax savings for the employer. If you are an employer looking to offer life insurance coverage to your employees, consider the ESDA as a tax-advantaged alternative to traditional plans.
