The employee pays the balance. All The employer pays the entire premium and the employee pays income tax on the economic value of the employee's share of the death benefit. The employer pays the employee a bonus in the amount of the economic benefit, which is deductible to the employer and taxable income to the employee. The employee pays the economic benefit portion of the premium from the proceeds of the bonus. The employee is taxed on the bonus.
Some plans also pay a bonus to cover the tax due.
Since the employer can pick and choose those employees who will benefit, split dollar can be used to attract and retain key employees. A split dollar arrangement may be an attractive way to lower the estate value by having an irrevocable life trust or family member to pay for the cost of death benefit protection. In a small family owned business there may be less than desirable tax consequences using an arrangement whereby the corporation redeems the deceased owner's stock. However, the premiums may be too costly for some stockholders. Due to antidiscrimination rules the amounts of group term insurance on key executives may be limited.