Legal Memorandum: Lump-sum Payment and Premium Payment by Employer

Issue: Under federal law, if an employer amends an employee life insurance benefit program and no longer requires employees to contribute to the premiums and offers a lump-sum payment as reimbursement for previous premiums paid, is there an argument that the lump sum payment is simply a premium payment made by the employer?

A lump-sum distribution could be treated the same as any other premium payment by the employer, provided the requirement for its repayment from the policy proceeds remains in effect.  In that event, it could be treated as taxable in the year paid to the extent it exceeds the annual term-life value of the policy.  Some commentators would take this reasoning a step further and treat the lump-sum payment as part of the interest-free loan to be paid from the policy proceeds at the time of the employee’s death.  Michael A. Yuhas & James A. Fellows, The Taxation of Split-Dollar Life Insurance:  A Solution to the Dilemma, 75 Taxes 252, 260-6 (May 1997)

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