Master
System Provides Split Dollar Alternatives
Premium
Loan Arrangement
The likely result
of final regulations will require an alternative structure to existing
Collateral Assignment / Equity Split Dollar arrangements, whereby
corporate premium payments will be considered a series of loans
and subject to interest at a rate set by the corporation. If the
rate set were to be less than the Applicable Federal Rate (AFR),
the difference would be considered imputed income to the executive.
Recent Long-Term
Applicable Federal Rates (AFR)
|
Date
|
Annual
|
Semi-Annual
|
Quarterly
|
Monthly
|
|
Jan-2000
|
6.45%
|
6.35%
|
6.30%
|
6.27%
|
|
Feb-2000
|
6.77%
|
6.66%
|
6.61%
|
6.57%
|
|
Mar-2000
|
6.75%
|
6.64%
|
6.59%
|
6.55%
|
|
Apr-2000
|
6.49%
|
6.39%
|
6.34%
|
6.31%
|
|
May-2000
|
6.20%
|
6.11%
|
6.06%
|
6.03%
|
|
Jun-2000
|
6.39%
|
6.29%
|
6.24%
|
6.21%
|
|
Jul-2000
|
6.40%
|
6.30%
|
6.25%
|
6.22%
|
|
Aug-2000
|
6.22%
|
6.13%
|
6.08%
|
6.05%
|
|
Sep-2000
|
6.09%
|
6.00%
|
5.96%
|
5.93%
|
|
Oct-2000
|
5.96%
|
5.87%
|
5.83%
|
5.80%
|
|
Nov-2000
|
6.09%
|
6.00%
|
5.96%
|
5.93%
|
|
Dec-2000
|
5.98%
|
5.89%
|
5.85%
|
5.82%
|
|
Jan-2001
|
5.78%
|
5.70%
|
5.66%
|
5.63%
|
|
Feb-2001
|
5.48%
|
5.41%
|
5.37%
|
5.35%
|
|
Mar-2001
|
5.58%
|
5.50%
|
5.46%
|
5.44%
|
Depending on
the type of loan arrangement either each premium will be subject
to the AFR in effect at the time of the loan (a term loan)
or the cumulative loan would be subject to a rate set annually (a
demand loan). The AFS Master System currently uses the demand
loan methodology.
Under either
the term loan or demand loan method:
- The executive
must pay the interest due the corporation:
- out of
pocket (taxable revenue to corporation),
- from
a bonus provided by company (wash to corporation),
- from
policy distributions (taxable revenue to corporation), or
- by capitalizing
the interest, thereby increasing the total loan amount.
- The executive
receives imputed income equal to the AFR less the interest rate
being charged to the employee multiplied by the amount of the
loan. (If this amount is less than zero, no imputed income is
considered.) The taxes on the executive's imputed income may:
- be paid
by the executive out of pocket,
- be provided
by the corporation as a bonus to the executive equal to the
executive's tax due on the imputed income,
- be provided
by the corporation as a grossed-up bonus to result in zero
after-tax outlay for the executive, or
- remove
funds from the policy to pay the taxes, and result in a zero
after-tax outlay for the executive.
The interest
due or imputed is considered revenue to the company.
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