Split Dollar Insurance, CompDoctor January 2000

Question: I have been approached by a firm that believes that a split dollar life insurance policy would be appropriate for my situation as the head of a small privately held company. I have never understood split dollar policy; can you shed some light on it for me so that I can make an informed decision? H. M.

CompDoctor™: My dear H. M. It appears that this insurance broker wants to inform you that you are both valuable to the company, but will, eventually pass on. What an inspiring thought. Here is the deal. Split dollar life insurance is not a unique kind of life insurance policy, but an arrangement by two parties to jointly purchase a permanent, cash value life insurance policy. Usually this is done for senior executives, whereby the company pays the premiums and you get the insurance coverage. Man businesses have some form of split dollar for their executives, because it is a benefit that they can provide to a few, without violating ERISA guidelines.

Here is how it works. There is a premium, a cash value, and a death benefit. Premiums are split with the executive paying the "term insurance cost", which is usually quite low in comparison to the death benefit's value. The employer pays the remainder, which is usually more. Under one form of the policy, known as the "collateral assignment" the death benefit and cash value are first allocated to the employer, up to the amount of the cumulative premium, with the balance allocated to the executive or, (heaven forbid) to your designated beneficiary. Under the "endorsement" form, the employer owns the policy and the death benefit it allocate do the executive.

Now, after all that detail, here is the real benefit: Normally at retirement, the employer normally "awards" its share of the policy to the executive. If that is the case, the executive obtains the death benefit and the cash value of the policy. Uncle Sam may take a piece of the gift, but there are ways to make this transfer occur without out of pocket taxes to you.

Split dollar is a good way to build up a sizable cans value policy to fund retirement and provide for a substantial death benefit at the same time. It is more tax efficient than a group term policy and is used to provide for estate tax protection and the risks associated with nonqualified retirement plans, such as a phantom share plan or a deferred compensation plan that many employer use.

So, H. M., if you have a need to be protected from an untimely demise, or feel the need to protect a retirement value in a tax efficient manner, spit dollar may the path to take. Of course, if you are like me, insurance is one of those necessary evils. But, here's the good, news, because of the substantial commissions that the insurance guy gets from you, he should at least take you golfing after you signup for the policy.

Question: I'm looking for some advice on part-time pay and I thought who better to go to for compensation advise then the compensation expert. We currently have one employee who works part-time, but I anticipate a greater need for part-time workers as we develop a flexible scheduling program. To get right to the point - do most companies have their part-time employees on the same pay grading systems as their full-time employees or do they pay a percentage of the full-time rate or . . . .?

Any insight you can give in this arena would be greatly appreciated. K.N.

CompDoctor™: It depends. Oh boy, is that a favorite phrase of HR people. But, it is true, because each situation is always a little different. It would be nice if we could go to the "Answer Book" look up the question and have the "right" answer. The burden of living in a subjective world.

Ok, you asked. I am at your service with a ready answer and a snappy spin. If the employee is hourly, most companies will pay the hourly rate for the hours that they work. For some companies who have a constant need for part-timers, such as UPS, they have had to pay a premium to get people to take less than full time work. At UPS, they pay benefits. You might want to do this as well, but I don't see that you should go there right way. If the position is exempt, then companies will pay the percentage of pay for that position that they will work. For example, if the normal pay for that job on your grading system is $30,000 and the part timer works a 30 hour week, then they get 75% of the normal pay. Raises and increases are handled a little differently. In this case they raise their pay when they have put in the equivalent of a full time year--in other words, after 2080 hours, whenever that occurs.

For non-exempt work, the pay situation is a little more straight forward, since you can pay them on an hourly basis, and not worry too much about whether they work 30 hours this week and 27 hours next week.

The trick here at least in my experience especially with exempt part timers is that they may work 35 hours one week and 20 hours the next. Over the period, they average about 30 hours a week. Well, what do you pay them? When this happened in my situation, we agreed to an average work week, and recognized that they would work a few more hours one week and a few less the next week, but overall, it would average to our agreed upon pay level. That appeared to work out the best. You also need to be careful of when employee benefits start to kick in. some companies will provide pro-rated benefits to their part-timers who work 30 or more hours per week. But that is between you, your benefits carrier and the employee.

Whew, this was more complex then I thought. Are you sure you want to hire part- timers?

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