As the corporate landscape evolves, so do the structures of employees’ deferred compensation plans. The predominant model is the split-dollar life insurance (SDLI) loan regime. This innovative plan allows an employee-owned life insurance policy to serve as collateral for loans obtained from credit unions to fund life insurance premiums.

How It Works

The SDLI framework is established through a contractual agreement between the employee and credit union. This agreement must clearly outline the terms regarding loan repayment if the employee departs from the credit union before retirement. This aspect is particularly crucial in cases where the outstanding loan amount exceeds the cash surrender value (CSV)* of the life insurance policy at the time of the employee's exit from the organization. The circumstances under which an employee leaves must also be defined. The SDLI agreement specifically articulates whether it operates with or without recourse to the employee. With recourse, the employee bears responsibility for any deficiency. Without recourse, any shortfall is solely the credit union’s responsibility.

The dynamics of premium payments, investment option allocations, accrued loan interest rates and the employee's capacity to borrow against their life insurance policy can lead to situations where the loan surpasses the life insurance policy's CSV. To mitigate risks, some credit unions procure additional insurance policies to safeguard against loan repayment obligations arising before the employee's death, which is generally presumed to be the primary repayment method. Although this additional coverage may buffer potential shortfalls, it does not alter the required accounting treatment.

Accounting Best Practices

When the SDLI agreement stipulates recourse for any deficiency between the CSV and the loan, plus accrued interest, the correct accounting treatment is to record the receivable on the credit union’s records as the outstanding loan balance and any related accrued interest. Accordingly, it is prudent for the credit union to undertake thorough due diligence regarding the employee’s ability to cover any potential deficiency. If the agreement states there is no recourse provision, the loan and interest accrued cannot exceed the CSV of the life insurance policy. 

The most applicable guidance, EITF 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements," states employers should recognize and measure an SDLI asset based on the arrangement's nature and substance. This includes any future cash flows the employer may be entitled to and the employees' obligation and ability to repay the employer.

This EITF makes it clear when the employer is only entitled to the policy's CSV for repayment of the loan to the employee, and the loan to the employee is without recourse, the asset should be marked to the lower of the CSV or the loan value.

Certain service providers propose that the net present value of future death benefits be considered a cash flow source, allowing the SDLI asset to be measured at the loan value even when the policy's CSV is below the loan value and the loan is without recourse. This method does not adhere to Generally Accepted Accounting Principles (GAAP).

Doeren Mayhew’s credit union pros recommend always adhering to the most applicable GAAP, specifically those related to governing investments in insurance contracts. According to Accounting Standards Codification (ASC) 325-30-35-1, an asset reflecting an investment in a life insurance contract must be recorded at the amount that could be realized under the insurance policy as of the financial statement date. Therefore, the death benefit should not be considered a cash flow source when measuring an SDLI asset.

Here to Help

Need assistance in properly accounting for your credit union’s split-dollar or other retirement plans? Rely on Doeren Mayhew’s credit union pros to help navigate the complexities and provide guidance.

*For the purposes of this article, any reference to CSV should include any related premium and tax accounts that may be related to an individual’s life insurance policy.