Computing Imputed Income for Joint and Survivor Split Dollar Arrangements

A participant’s split dollar economic benefit is determined by multiplying a cost per $1,000 factor (based on the participant’s age) by the participant’s benefit under the split dollar arrangement, divided by 1,000. But how is the economic benefit determined when the arrangement involves a joint and survivor life insurance policy? We have observed diversity in practice with regard to how the economic benefit is computed for these types of arrangements. In particular, some computations include an interest rate discount factor of 2.5% when determining the cost per $1,000 rate whereas others do not. Is this factor appropriate? What is its purpose? Where did it originate?
This paper summarizes our research and findings as to whether a 2.5% discount rate factor is set forth by the IRS and/or otherwise appropriate to use.