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In 2016, a split-dollar life insurance agreement between the University of Michigan and its head football coach, Jim Harbaugh, received extensive publicity. (Read Tax Reform Elevates Split-Dollar Arrangements As Incentive Plan).
Harbaugh’s agreement, as reported by Dan Murphy, ESPN, (2016) and a Freedom of Information Act request, shapes up like this, “In addition to paying a $5 million salary for each of the remaining six years on his deal, Michigan also will loan Harbaugh $4 million in 2016 and an additional $2 million for the following five years to pay the premium on a life insurance policy.”
“As long as the insurance policy stays active,” explained Murphy, “Harbaugh does not need to repay the loan until he dies. At that time, the university can recoup its original investment and the rest of the insurance payout would go to whomever Harbaugh chooses as his beneficiaries. Should the policy be stopped at any point, Michigan would still be entitled to get its money back from the insurer.”
It’s Game Day
With college sports finally getting back underway (more or less) it is a good time to note that since Harbaugh’s split-dollar life insurance agreement when public, other universities have followed suit.
An article titled, “Why College Coaches Are Being Paid With Split-Dollar Life Insurance, published May 2020 by Financial Advisor pointed to other high profile split-dollar life insurance arrangements. Specifically noted were Clemson head football coach, Dabo Swinney; LSU head coach Ed Orgeron; and University of South Carolina women’s basketball head coach, Dawn Staley.
Split-Dollar Life Insurance Agreements Work for Many Applications
The use of split-dollar life insurance arrangements as an alternative to deferred compensation is not a new concept. Many people think of it as a tactic employed only by large organizations seeking to retain top executives. In fact, it can be an effective strategy for both non-profit and for-profit organizations, S corps, and as a component of succession planning for family owned businesses. In the post-pandemic workplace, split-dollar arrangements may be particularly appealing to businesses working to stabilize their operations through the retention of key talent.
Among the reasons that organizations use split dollar life insurance are:
- Providing an executive benefit
- Increasing the likelihood of long-term employee commitment
- As a means to provide proceeds to a person or entity that does not have the resources to pay or save sufficiently for retirement
- An endorsement method
- For collateral assignment, where the employee owns the policy and the employer is treated as if it is lending payments to the employee
Use of a split dollar arrangement can be a standalone benefit to the employee or paired with a nonqualified deferred compensation plan (NQDC). When designed effectively, the agreement benefits both the employee and the employer, however, tax code defining the use of a split dollar plan is complex and is subject to revision. Organizations will want to consult with their tax advisors and other executive benefits consultants before entering into this type of arrangement.
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