401k plan loan interest

[Guest fender5150]

I have been asked to create an amortization schedule for a 401k loan. Do I just follow the loan terms the the Plan description? Are there also statutory requirements, involved with the creation of this document?

Frankly; I was taken aback by this request, but I don't want to over-simplify things if the Gov't has already over-complicated them.

Thanks

Fender

[WDIK]

Participant loans from qualified retirement plans must meet certain statutory requirements such as the level amortization requirement, repayment term requirement, enforceable agreement requirement and dollar limitation requirement. Refer to Section 72(p) of the Internal Revenue Code.

Participant loans from qualified retirement plans must also meet the provisions spelled out in a plan document and loan procedure policy, which should include language regarding interest rates, number of loans, etc.

[J Simmons]

IRC §4975(d)(1)(D) and DoL Reg sec §2550.408b-1(a)(1)(iv): to not be a PT, the loan must bear a 'reasonable rate of interest'.

Also see Treas Reg §1.72(p)-1 about interest rate being 'commercially reasonable' in order for the loan not to be deemed a distribution.

[Guest fender5150]

Thanks wdik!

The definition and remedy of a loan default seems harsh. My landlord's not even that mean!

Take care!

Fender

401ktest.com

[BG5150]

The definition and remedy of a loan default seems harsh. My landlord's not even that mean!

Not even my BOOKIE is that mean!

[Kimberly S]

Surely you guys know that the IRS wrote the book on mean! Landlords and bookies are all just wanna be's in that arena.

[Belgarath]

FWIW - while I've never seen any IRS blessing of this, the interest rate I've seen most commonly used is (prime +2%.) While I haven't heard of it being blessed, neither have I heard of it being challenged.

This is for the 5 year loans. For a longer term loan for a purchase of a principal residence, I suspect it might be appropriate to adhere more closely to comparable local commercial rates?

[masteff]

My former company had a full plan audit a couple years ago (three 401(k) plans w/ combined assets around $700M). Those plans use prime as published by US Treasury. (Not even prime+, just straight prime.) No questions or issues were raised about this rate, which was clearly described in writing in our loan rules. Similar to Belgarath's caveat, not getting questioned in audit is not the same as being blessed by the Service, but certainly is a good indicator.

On a personal note, I'm probably more in favor of prime+ than just straight prime. +2-3% certainly is reasonable.