stephen Posted April 10, 2003 Share Posted April 10, 2003 Is it ok to set up a 20 year internal loan (loan between the ESOP and the company) with a 0% interest rate? The issue is 404 deduction limit and having no interest would be helpful. I was also wondering if it is ok because the net result of a 20 year loan with 0% interest would be a principal only release method. Link to comment Share on other sites More sharing options...
RLL Posted April 15, 2003 Share Posted April 15, 2003 stephen --- In the case of a below-market rate of interest loan, the IRS should "impute" interest under the related party loan rules and under the section 415© regulations. Link to comment Share on other sites More sharing options...
stephen Posted April 15, 2003 Author Share Posted April 15, 2003 Thus, the minimum interest rate they should use would be the going market rate for a 20 year loan? Link to comment Share on other sites More sharing options...
Kirk Maldonado Posted April 16, 2003 Share Posted April 16, 2003 RLL: While I agree with you that there could be imputed interest on a zero interest rate loan, would that have any practical impact. other than increased annual additions to participants under Section 415? For example, because the ESOP is exempt from tax, any "additional" income caused by the zero interest rate would not be taxable to the ESOP. Also, the employer would (presumably) get an increased deduction for the deemed contribution to the ESOP (relating to the imputed interest), but it would correspondingly have increased income because of the ESOP's repayment of the imputed interest, so that there would be no net additional income or deduction to the employer. (I recognize that in some limited circumstances, this could cause the employer to exceed the deduction limitation.) What are your thoughts? Kirk Maldonado Link to comment Share on other sites More sharing options...
RLL Posted April 16, 2003 Share Posted April 16, 2003 Hi Kirk --- stephen said in his original post that "[t]he issue is 404 deduction limit and having no interest would be helpful." I implied from that statement that the section 404(a)(9)(B) deduction (for contributions used to pay interest on an ESOP loan) is not available.....maybe the employer is an S corporation. Under such circumstances, the imputing of interest could affect the ability to amortize the ESOP loan with deductible contributions. As you know, having a leveraged ESOP in an S corporation has become very common in recent years. Link to comment Share on other sites More sharing options...
stephen Posted April 17, 2003 Author Share Posted April 17, 2003 It is an S-corp. Link to comment Share on other sites More sharing options...
IRC401 Posted April 17, 2003 Share Posted April 17, 2003 Does having a 0% interest loan raise the issue that the plan overpaid for the stock because it could get cheap financing? Link to comment Share on other sites More sharing options...
RLL Posted April 17, 2003 Share Posted April 17, 2003 Hi IRC401 --- I think that the valuation issue is separate from the financing issue. The employer is providing the financing to the ESOP and will also provide the ESOP with the funds needed to repay the loan. It seems to be in the best interests of both the employer and the ESOP participants to have the loan at the lowest possible interest rate. But using a below-market-rate of interest would, in fact, just be a way to circumvent the 25% of pay deduction limit under IRC section 404(a)(3). I see no ERISA issue here. Link to comment Share on other sites More sharing options...
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