What is a split dollar plan?

A split dollar plan is a unique arrangement regarding life insurance where both the employee and employer contribute towards the cost of the premium. In this setup, the employer typically pays a significant portion of the premium, while the employee may also contribute a share, creating a collaborative funding method for a life insurance policy. This structure allows for shared ownership and shared benefits, which can be advantageous for both parties.

The primary advantage of a split dollar plan is that it provides life insurance protection for the employee and may even serve as a benefit that can help attract and retain talent in an organization. Upon the employee's death, the beneficiary receives the death benefit, while the employer is often entitled to recover its premium contributions. This arrangement can be particularly beneficial in executive compensation planning and can help in providing tax advantages to both the employer and employee.

Options that suggest only the employer pays all premiums, or that insurance is purchased independently by employees, do not capture the essence of the split dollar plan, as these imply a unilateral approach to premium payments. Similarly, a focus on coverage solely for accidents does not pertain to the life insurance aspect crucial to a split dollar arrangement. Therefore, the definition involving co-purchase by both the employee and employer accurately reflects the nature of a split dollar