CEOs may soon have to say goodbye to a tax-free insurance benefit.
The Internal Revenue Service has plans to crack down on split-dollar insurance, a common executive perk. Split-dollar insurance is the practice by which a company takes out a whole-life insurance plan in an executive’s name and splits the annual premium payments with him or her. As the equity in the policy grows, the exec can take loans against it. When the policy is cashed in, the firm recoups only the amount it paid in premiums. The exec (or the estate) can bank the leftovers—tax free.
Though nothing is official yet, the IRS has indicated plans to make executive beneficiaries pay taxes on any cash benefits they pocket, according to G. Michelle Ferreira, an attorney with Greenberg Traurig in East Palo Alto, Calif., and former associate chief counsel for the IRS. (The agency did not return calls seeking comment on the possible policy change.)
Entrepreneurs on the IPO track face another concern. Any loan an executive takes against his or her life insurance could be construed as a direct loan from the company—something that’s now forbidden under Sarbanes-Oxley.
DARREN DAHL is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.