More than ever, nonprofits are under increasing pressure to achieve their missions with limited resources. Attracting highly talented executives is crucial, yet nonprofits often compete with organizations that have larger budgets and can offer more generous compensation packages. At the same time, nonprofits must be mindful of public perception regarding executive compensation and the scrutiny that accompanies the allocation of limited resources.
The more common and traditional tax-deferred compensation plans may not always be feasible due to budget constraints, donor expectations, or regulatory limits. A split-dollar arrangement — an agreement to share the costs and benefits of a permanent life insurance policy — offers a flexible, tax-advantaged strategy for attracting and retaining top leadership. While there are two primary types of split-dollar arrangements, this discussion will focus on the benefits of the collateral assignment (or loan) regime.
Excess Compensation Excise Tax
If your nonprofit pays an individual employee more than $1 million a year, the IRS imposes a 21% excise tax under IRC section 4960 on the excess. Traditional non-qualified plans, especially IRC 457(f) arrangements, can make this more likely because benefits are counted as compensation when they vest, even if the cash is not paid yet. As a result, even if an employee’s W-2 wages are below $1 million, the vesting of a 457(f) benefit can push total compensation over the $1 million threshold.
A collateral assignment split-dollar plan works differently. In this structure, the nonprofit advances life insurance premiums as a secured loan to a policy owned by the executive. These advances are generally not treated as current compensation for purposes of the $1 million threshold. This setup can help smooth reported compensation and reduce the risk of triggering the excise tax, especially with the sudden impact of a sizable 457(f) vesting event.
Form 990
A collateral assignment split-dollar plan can present more favorably on your nonprofit’s Form 990 because it is typically reported as a loan on Schedule L, rather than current compensation in Part VII. The Form 990 disclosure will show a recoverable loan instead of excess compensation. This also helps with the ratio of program expenses to total expenses that rating agencies focus on. Presenting the arrangement as a loan often improves optics, and when the terms are fair, set at market rates, and properly approved, it is less likely to raise concerns about excess benefit transactions under IRS Section 4958.
A collateral assignment split-dollar plan is highly customizable because it is not a qualified retirement plan and, if appropriately structured, is not subject to the rigid requirements of the Employee Retirement Income Security Act (ERISA). This flexibility allows you to design the arrangement to fit both your organization’s needs and the executive’s situation. You can set vesting schedules, select market-rate interest, decide how and when premiums are advanced, and determine how death benefits and cash values are shared and accessed.
Why Nonprofits Should Consider Using Split-Dollar Arrangements
Talent attraction and retention
Split-dollar plans can offer a meaningful executive benefit without a significant increase in cash compensation.
Donor confidence and transparency
A documented, secured receivable and clear Form 990 disclosures demonstrate financial stewardship.
Flexibility
Plans can be tailored to each executive’s facts and circumstances regarding the amount, vesting, and other key factors.
Getting started
If you’re evaluating executive compensation options, a split-dollar arrangement can be tailored to your organization’s goals and constraints. Engage your board, benefits counsel, and tax advisors early to design a compliant, mission-aligned structure that supports recruitment and retention while maintaining donor and public trust.
To explore whether a split-dollar arrangement fits your executive compensation strategy, contact CBIZ for assessment and implementation guidance.
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