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Investment choices are a benefits/rights/feature that must be offered in a nondiscriminatory manner. it is all part of the 401(a)(4) rules. https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%284%29-4 (Edit I had said the rules were 401(a)(1) I quote the 401(a)(4) rules which are the BRF rules)

I can tell you that most, or at least some, recordkeepers will just default on the outstanding balance (no interest). If it's a plan where there is no (platform) recordkeeper, then we (third party administrator) will definitely just default on the principal balance if the loan default occurs in the same year as the last payment. Probably the same result if the default occurs in the next year, although I might have to look it up. Something about deferring the default for a year makes my Protestant upbringing want to add a little bit of interest as a pound of flesh but I can't say for sure if we've done that, or done it consistently. I don't know if there is a "right" answer but maybe somebody else does.

Of course it is compensation. The problem, however, is that the safe harbor in 1.414(s)-1©(3) allows you to exclude "fringe benefits (cash and noncash)," without telling us what a cash fringe benefit is!

Not sure I am following you, Mike Preston. If a plan provides for immediate vesting on employer contributions generally, why can't it provide that any additional contributions necessary to satisfy TH will be subject to a 3-year cliff? That was what I was suggesting, but if it came out garbled that's my bad.

I agree with all the comments to the effect that the TH minimum vesting schedules are only minimums; vesting in a TH plan can certainly be more generous. As to one of the OP's questions, if the plan sponsor is generous and has immediate vesting for the contributions it makes intentionally, but wants to impose a 3-year cliff vesting schedule on additional contributions which Uncle Sam forces him to make due to the TH rules, that can be done (with care in drafting not to mention proper record-keeping).