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Employer-Owned Policies and Split-Dollar: Compliance, ERISA Issues, and Best Practices

High-net-worth (HNW) families and closely held businesses in the United States commonly use life insurance to transfer wealth, provide liquidity for estate taxes, and reward or retain key executives. Two strategies that frequently intersect are employer-owned life insurance (EOLI) and split-dollar arrangements. This article explains the compliance, ERISA risks, tax traps, and pragmatic best practices for advisors and business owners in New York, California, Texas and across the U.S.

Executive summary

  • Employer-owned policies and split-dollar can be powerful estate-planning tools when correctly structured.
  • Key statutory/regulatory risks include IRC §101(j) notice/consent requirements, ERISA fiduciary exposure, and income tax consequences depending on whether the arrangement follows the loan regime or the economic benefit regime.
  • Practical costs include attorney drafting fees, carrier premiums for permanent policies, and valuation/administration costs — plan for both upfront and ongoing compliance expenses.
  • Use robust documentation, consistent accounting, independent valuations, and ERISA/benefit-plan analysis before implementing.

Why employers and HNW owners use these strategies

  • Provide liquidity for estate and succession planning (e.g., buy-sell funding).
  • Compensate or retain executives using favorable tax timing.
  • Preserve family wealth in closely held firms without immediate cash outlays by the company.
  • Combine business continuity and wealth transfer goals into a single transaction.

Core compliance and tax rules to know (U.S.)

  1. IRC §101(j) — Employer-Owned Life Insurance (EOLI)
    Employer-owned policies issued after August 17, 2006 are subject to notice and consent rules under IRC §101(j). If the notice and consent (and certain exceptions) are not met, death proceeds may be includible in the employer’s taxable income or otherwise trigger compliance risks. For statutory text and background, see Cornell LII: https://www.law.cornell.edu/uscode/text/26/101

  2. ERISA considerations
    A life insurance arrangement can be an ERISA-covered welfare benefit plan if the employer’s intent and the plan design create a “plan” for providing benefits (participant-oriented communications, employer funding/administration, or selection of beneficiaries). The Department of Labor provides high-level ERISA guidance: https://www.dol.gov/general/topic/health-plans/erisa

  3. Split-dollar regimes — loan vs economic benefit

    • Loan regime: Employer’s premium advances are treated as policy loans (below-market loan rules may apply under IRC §7872). Interest/repayment terms must be documented.
    • Economic benefit regime: The employee recognizes taxable economic benefits (imputed income) for the term cost of employer-provided life insurance; employer may be taxed on cost or benefits differently.
      For detailed regime analysis, see internal resources like Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today.

ERISA risk factors (practical indicators)

An arrangement is more likely to be an ERISA plan if:

  • The employer performs ongoing administration (premium payments, beneficiary designations, claims handling).
  • Employees receive standardized written communications describing the life insurance as a benefit.
  • Employer reserves rights to change coverage or designate beneficiaries without employee consent.

If ERISA applies, fiduciary duties, reporting, bonding and PBGC issues may arise. Always obtain a legal ERISA determination before implementing employer-sponsored split-dollar.

Employer-owned policies vs split-dollar: quick comparison

Feature Employer-Owned Life Insurance (EOLI) Split-Dollar — Loan Regime Split-Dollar — Economic Benefit Regime
Who owns the policy Employer Typically employer owns; loan from employer to employee or vice-versa Employer or third party owns; employee receives economic benefit
Immediate employee taxable income Generally not if 101(j) & exceptions met Taxable only if imputed interest under §7872 or forgiven loan Employee may realize imputed compensation for economic benefit
ERISA exposure Possible if structured as a benefit plan Possible — depends on administration/communications Possible — likely if employer funds and controls policy
Typical uses Key person insurance, buy-sell funding Executive compensation, tax-efficient funding Executive compensation and fringe-benefit design
Documentation needed Notice/consent (101(j)); insurable interest Loan docs, repayment schedule, interest terms Valuation of economic benefit, substantiation of cost

Costs and market pricing (U.S. examples)

  • Permanent life-insurance premium ranges for HNW planning vary widely by carrier, issue age, underwriting class and product (survivorship vs single-life, universal life vs whole life). Typical annual premium ranges:
    • $1M–$5M coverage (age 50–60, HNW risk classes): roughly $10,000–$50,000/year.
    • $5M–$20M coverage (survivorship/UL for estate tax liquidity): $40,000–$250,000+/year depending on age and structure.
    • Source for consumer-level pricing and general market ranges: Policygenius life-insurance costing guide — https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/
  • Example carriers commonly used in HNW planning: John Hancock, Lincoln Financial, Prudential, Northwestern Mutual, Mutual of Omaha. Policy features and pricing differ materially; carriers often require exhibit-level underwriting for large face amounts.
  • Setup and advisory costs (typical U.S. market ranges):
    • Legal drafting and transaction counsel: $5,000–$30,000+ depending on complexity (split-dollar, trusts, buy-sell language).
    • Actuarial/valuation and modeling: $2,000–$15,000.
    • Carrier policy fees and illustrations (issued): carrier-specific — no standard fee but target premium funding is carrier-determined.
  • Example: a $5M survivorship UL used for estate liquidity in California or New York might target premiums between $40k–$150k/year with Lincoln Financial or John Hancock depending on age and underwriting; obtain carrier-specific illustrations and underwriting terms for exact pricing.

Note: figures above are market-range estimates and will depend on underwriting and product election. Use insurer illustrations for precise quotes.

Best practices checklist (compliance-first approach)

  • Perform an ERISA assessment before signing any split-dollar or employer-owned policy documents. Treat ERISA analysis as a gatekeeper.
  • Satisfy IRC §101(j) for employer-owned policies: provide written notice, obtain written consent, and document exceptions (e.g., certain ownership/relationship exceptions).
  • Choose the split-dollar regime intentionally: document whether the arrangement operates under the loan regime or economic benefit regime and model tax impacts in advance.
  • Use written split-dollar agreements with clear repayment/termination mechanics, collateral/priority terms, and default remedies. See drafting guidance in Drafting Split-Dollar Agreements: Protecting Interests, Valuation, and Repayment Terms.
  • Maintain contemporaneous records: premiums, premiums-paid ledger, valuation reports, loan ledgers, communications to employees and beneficiaries.
  • Run “what-if” modeling for death events, policy lapse, termination, and policy loans. Consider how transfer-for-value rules could affect income tax on death proceeds in estate or secondary-market transfers; see concepts in Unwinding Split-Dollar: Tax Traps, Transfer-for-Value, and Post-Termination Risks.
  • Coordinate with estate planning documents (trusts, buy-sell agreements) and ensure insurable interest exists. See planning integration in Designing Split-Dollar with Trusts and Buy-Sell Agreements for Business Owners.

Operational safeguards and governance

  • Use independent valuations at both setup and meaningful change events. If a policy finances a buy-sell, get formal valuation bids.
  • Institute a benefits committee or designate fiduciary agents to oversee policy administration and vendor selection.
  • Re-evaluate annually: premium stress tests, carrier credit risk assessment, and interest-rate environment (policy crediting and carrier loan rate exposure).
  • For key executives in New York City, Los Angeles, Houston or Dallas, ensure state-specific insurance and premium tax considerations are included — carriers and advisors should confirm state filing and premium tax impact.

Practical examples (brief)

  • Closely held manufacturing firm in New Jersey funds a $10M survivorship policy to provide estate liquidity for two owners aged 62 and 59. The firm structures an employer-owned policy with notice/consent under §101(j), funds target premiums of approximately $80k–$200k/year (illustration-dependent), and integrates coverage with the firm’s buy-sell agreement.
  • Texas-based tech founder uses a split-dollar loan-regime to provide a $3M single-life policy to a key executive. The company documents an arm’s-length loan with interest at comparable corporate borrowing rates, maintains loan ledgers, and executes termination triggers on change-in-control.

When to call outside specialists

  • Complex multi-owner buy-sell funding with survivorship policies and contested family dynamics.
  • When policy face amounts exceed typical simplified underwriting limits ($2–3M for many carriers) or where captive/foreign ownership or cross-border residency issues exist.
  • Where ERISA exposure is ambiguous — always obtain counsel experienced in employee-benefits litigation risk.

Conclusion

Employer-owned policies and split-dollar arrangements are high-value tools for HNW estate planning and executive compensation, but they are also compliance-intensive. For business owners in California, New York, Texas and elsewhere in the U.S., adopt a compliance-first approach: confirm ERISA posture, satisfy IRC §101(j), choose the correct split-dollar regime, and document everything. Engage experienced tax, ERISA, and insurance counsel to produce firm-level governance and preserve the intended estate and tax outcomes.

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