5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
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.
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