One nonqualified plan is the split-dollar arrangement in which the employer assists the employee with the purchase of permanent life insurance protection. The parties enter into an agreement to split the policy's death benefit, cash value and premium payment. Under the arrangement, the employee must either pay a portion of the premium or be taxed on it. This amount, called the value of the economic benefit, is determined on a tax-favored basis that depends on the employee's age and the amount of their death protection under the plan.

There are generally two kinds of agreements. In the collateral assignment method, the employee owns the policy and assigns an interest in the cash value to the employer. In the endorsement method, the employer owns the policy and endorses part of the death benefit back to the employee. In either case, the employer helps the employee with the policy's premium payment and takes a specified interest in the policy.

In either approach, the employer forgoes a current tax deduction for its premium payment in favor of recovering its interest from the future policy values either at the plan's termination or the insured's death. It is important to consider the tax ramifications before implementing a plan. They will depend upon the various elements of plan design.