What’s ‘split-dollar’ life insurance? Valley Children’s has invested $50 million-plus in it

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When Valley Children’s Hospital publicly posted its latest federal nonprofit tax filing in mid-August, the document contained details about more than $52 million it spent on sophisticated life insurance arrangements with key executives.

The tax filing, which covers the hospital’s tax year ending Sept. 30, 2023, lists nine multi-million-dollar loans from Valley Children’s Hospital to eight of its top executives. The largest “original principal amount” was $11.1 million for the “loan” to CEO Todd Suntrapak, according to the tax filing.

These are not actually loans in the traditional sense, but are related to executive retirement benefits that also double as investments for the hospital. They’re included as assets in the nonprofit’s $2.1 billion portfolio. The life insurance investments, referred to in the financial services industry as “split dollar,” are expected to deliver a return that will more than reimburse Valley Children’s in the future for the upfront $52.1 million spent, according to the filing.

Generally, “split-dollar” describes a situation in which the person or entity with the money to pay the life insurance premiums (the employer) is different than the person for whom the death benefit is designated (the executive), and the two parties can split the costs and benefits, a financial services expert told The Fresno Bee. In addition to providing life insurance, the policies can act as retirement plans, if an executive survives into retirement, by providing tax-free loans.

Though it’s sometimes used by hospitals and their executives, these types of life insurance arrangements attracted national attention through the football program at the University of Michigan in 2016, when “split-dollar” was revealed as a retirement benefit tool in famed head coach Jim Harbaugh’s contract. The Lown Institute, a think tank that studies the U.S. healthcare system, told The Bee that it found a small fraction of the hospitals it tracks (for-profit and nonprofit) mentioned “split-dollar” specifically in their financial documents.

Though somewhat common in the corporate world, the larger question is whether these arrangements that have potentially tied up tens of millions of dollars for decades are appropriate for a nonprofit children’s hospital that solicits nickles and dimes from residents in this low-income region.

For some local elected officials, the answer is no. They think the money, and other components of the nonprofit’s executive pay packages, could be put to better use for community benefit. The sophisticated investments involving executive retirement benefits might not yield reimbursements for decades, experts tell The Bee.

Throughout this year, multiple Fresno City Councilmembers have criticized Valley Children’s decision to compensate its CEO more than $5 million annually between 2020-2022, calling those pay packages exorbitant and out of whack. They’ve also criticized a hospital board’s decision to give Suntrapak a $5 million forgivable home loan in 2022 as a retention incentive in lieu of other compensation. That year, Valley Children’s was the 16th largest nonprofit children’s hospital in the nation (by bed count), but Suntrapak had a larger compensation than all but two CEOs of those children’s facilities with more beds.

“If you have that kind of money, why not put it back into patient care,” Fresno City Councilmember Miguel Arias said in an August interview with The Bee. “That’s a lot of nurses and a lot of doctors that money could be going toward.”

Valley Children’s serves a 12-county region with 1.3 million children, and often touts that more than 70% of its patients are beneficiaries of Medi-Cal, the state’s insurance program for low-income people. The hospital is considered one of the best for children in the nation, consistently included on top hospital lists. It is located in Madera County just over the Fresno County line and is known by its multi-colored buildings off of Highway 41 North. It has about 500 acres that straddle 41 that includes a driving range and lots of fallow land slated for future development by the hospital.

Valley Children’s faces wage theft allegations

The hospital’s latest tax filing shows Suntrapak’s total compensation dropped to $3 million in 2023, as Valley Children’s had previously said would happen. The same document shows that the amount the hospital has spent on the “split dollar” life insurance arrangements has more than doubled since the tax year ending Sept. 30, 2018. At that point, Valley Children’s had invested about $26 million in “collateral assignment split-dollar” arrangements for four executives, including Suntrapak.

Valley Children’s is handling multiple lawsuits filed in Madera County by employees who have alleged wage theft, with the latest complaint in June brought by registered nurse Bonnie Ferreria on behalf of herself and all other workers affected between 2020-2024. Last month, court documents revealed Ferreria’s potential claims could be swallowed into the settlement agreement Valley Children’s is trying to advance for a different wage theft lawsuit launched in 2022. That agreement could nullify Ferreria’s specific claims for herself and her intended class and would provide her a reimbursement of just $54.58. She says that she is actually owed about 500 times that amount, or $27,832.

Ferreria’s allegations that nurses were compensated less than the minimum wage for their mandatory on-call shifts caught the attention of Fresno City Attorney Andrew Janz. He announced in June that his office’s new wage theft division would be investigating whether Valley Children’s committed that labor code violation at any of its operations in the city of Fresno.

Dr. Vikas Saini, a clinical cardiologist and president of the Lown Institute, described the Valley Children’s life insurance arrangements as another indication that the hospital’s executives “enjoy substantial benefits that are generally not available to regular folks.” The Lown Institute, based in Massachusetts, examines issues of executive compensation at nonprofit hospitals in its study of the healthcare system.

“It is clearly part and parcel of very generous compensation packages,” he said in a phone interview last week.

Richard Weber, a Bay Area financial services consultant and former Merrill Lynch Insurance Group executive, told The Bee that these types of life insurance arrangements are not out of the ordinary for financially strong organizations.

“This can be a very smart way of transforming an employee benefit that’s going to cost you something into something where you’re going to recover your money, albeit over a very long period of time,” he said in a recent interview.

Valley Children’s declined to answer The Bee’s questions about how its split-dollar life insurance arrangements function, whether any benefits from the policies are included in the total annual compensation figures for its executives, and how it decided to double its investment in these executive retirement benefits — from $26 million in 2018 to $52 million in 2023 — rather than spend that money on other things.

“Valley Children’s hires and retains outstanding caregivers and leaders to ensure we provide sick children with the best of care. The retention benefits we offer are common and appropriate for experienced, financially strong non-profits like us,” the hospital said in its email response to The Bee’s questions.

It is impossible to know exactly how the policies function without seeing the details, Weber said. But the hospital’s latest tax filing explains that Valley Children’s paid for its executives’ life insurance premiums in full at the implementation of the policies, and that no further payments are required.

“Under the arrangements, the hospital will accrue investment returns and interest on the premiums paid for the life insurance policies,” the tax filing says. “Upon the death of a covered executive, the hospital will be repaid the investment and accrued returns and any remaining proceeds will be donated to the hospital.”

As of September 2023, the hospital estimated that the return on its $52.1 million investment would be at least $78.9 million. This means the hospital will make back all the money it spent on the life insurance premiums, and then some.

“A new hospital without a lot of experience shouldn’t be doing this because they don’t know what their capital needs are going to be in the future,” Weber said, noting that a return on this type of investment could take decades.

But for a hospital that’s been around a long time and has strong revenues and reserves, “It could be a very legitimate decision to say, ‘In the 30-year view, it’s going to cost us a lot less to use this split-dollar vehicle, as opposed to the classic deferred compensation vehicle,’ ” Weber said.

What executive benefits does ‘split-dollar’ provide?

Valley Children’s executives with split-dollar life insurance arrangements “participate in the ... program in lieu of” other retirement program options, according to the hospital’s latest tax filing.

Although there are many variations, Weber, speaking generally, said there are typically two types of split-dollar policies.

In one, the employer “lends” on behalf of the employee the money to pay all the premiums of a life insurance policy that then accumulates interest over time. If the executive dies prior to retirement, the life insurance is paid out to the hospital, which then provides benefits to the executive’s beneficiaries. If the executive survives into retirement, the policy pays out benefits to the executive in the form of tax-free loans.

Explaining potential “split-dollar” retirement benefits conceptually, Weber said employees can begin taking loans from their life insurance policy when they reach a certain defined age, such as 65.

“And because life insurance cash value loans are not taxable, then the significant benefit is that the cash flow you’re taking from the policy is not taxed. So, that arrangement can be much more favorable than deferred compensation,” Weber said.

In the other type of arrangement, the employer is the beneficiary of a second policy on the executive’s life that can cover the cost of the original loan on the original split-dollar arrangement.

“But the distinction here is the entire the cash value will not ever be borrowed out,” Weber said. “The policy is kept strictly for its death benefit, and the death benefit repays the loan that was made on the first policy.”

Jim Harbaugh’s Michigan contract

ESPN reported in 2016 that the University of Michigan agreed to increase Harbaugh’s compensation by $4 million — to a total of $9 million — that year. But the $4 million served as a “loan” to the famed coach, who now leads the Los Angeles Chargers, for the payment of his life insurance premiums.

Harbaugh had six years left on his Michigan contract when his “split-dollar” life insurance benefits were made public. Each year after 2016, Harbaugh would receive his $5 million annual salary plus $2 million annual loans for the payment of his life insurance premiums.

News outlets reported the “split-dollar” life insurance details in Harbaugh’s contract after receiving information through a Freedom of Information Act request, because the University of Michigan is a public institution.

“As long as the insurance policy stays active, Harbaugh does not need to repay the loan until he dies,” ESPN reported in 2016. “At that time, the university can recoup its original investment and the rest of the insurance payout would go to whomever Harbaugh chooses as his beneficiaries. Should the policy be stopped at any point, Michigan would still be entitled to get its money back from the insurer.”

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