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CCH® PENSION — 03/15/12

IRS provides tips on how to determine if a plan loan's interest rate is "reasonable"

When a retirement plan allows participant loans, that loan is an investment of plan assets and must bear a "reasonable" rate of interest. In the latest issue of Retirement News for Employers, the IRS provides guidance on how to determine if a retirement plan loan interest rate is reasonable.

Under ERISA Reg. §2550.408b-1(e), a plan's loan interest rate is reasonable if it is equal to commercial lending interest rates under similar circumstances. To determine if a participant loan interest rate is "reasonable," the IRS advises employers to ask these questions: (1) What current rates are local banks charging for similar loans (amount and duration) to individuals with similar creditworthiness and collateral? and (2) Is the plan rate consistent with the local rates? The regulations provide several examples of how to determine a reasonable rate of interest for a plan loan.

Unless a reasonable rate of interest is assessed, participant loans may result in a prohibited transaction. As a result, the loans would not: (1) meet the requirements of ERISA §408(b)(1)(D); (2) be covered by the relief provided by ERISA §408(b)(1); and (3) meet the prohibited transaction exemption for participant loans in Code Sec. 4975(d)(1).

Source: IRS Retirement News for Employers, Winter 2012, February 13, 2012.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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