Split-dollar executive compensation plans: Doing it right

Under CASD plans, key personnel receive ownership of a life insurance policy the premiums for which are paid by the employer, but are repaid to it as interest-bearing loans,(Photo: Shutterstock)

Companies without stock or other types of equity have a limited toolbox from which to create customized incentive/retention arrangements for top executives. Salary and bonuses are the first line of attack, but they are mostly short-term focused and involve a one-way outflow of funds. Unfunded “457(f)” deferred compensation plans can achieve incentive/retention goals, but are taxable to the executive (and potentially to the business), also involve a one-way outflow of funds and place the risk of underperformance of funding assets on the company rather than the executive.

Enter collateral assignment split-dollar (CASD) plans, where key personnel receive ownership of a life insurance policy the premiums for which are paid by the employer, but are repaid to it as interest-bearing loans, and until repaid such loans are collateralized by the insurance policy.