Both, ERISA and the IRS requires that DC plan loans reflect a “reasonable rate of interest”.
DOL Reg Section 2550.408b-1 states that “a loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” A pre-existing DOL Advisory Opinion, 81-12A, suggests that plan sponsors should align their plan interest rate with the interest rate banks utilize.
The IRS has a similar requirement where they informally state that the Prime Rate plus 2% would be considered to be a reasonable rate. Some plans use the Prime Rate plus 1%, or a rate based on the Moody’s Corporate Bond Yield Average.
Plan sponsors should document justification for the plan loan interest rate selected.
For any further questions, please do not hesitate to email Wellspring Financial Partners at info@wellspringfp.com or call 1 (844) 203-2402.
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. ACR# 3860268 10/21. A proud member of RPAG.
