IRS has a new position on plan loan interest rate??? Anyone dealt with this?

[ERISAatty]

Hello, all,

I am currently working with an IRS VCP examiner to correct some improper plan distributions from a 401(k). The distributions were intended to be loans, but were not properly documented, amortized, etc.

IRS has approved correction, under the specific circumstances involved. Part of the correction, of course, is that the Plan will be repaid and made whole, with proper interest, etc.

What I'm puzzled about is this: In calculating the proper interest for the loans (taken out in 2011), I used Prime (3.25% in 2011) plus 2%. My understanding, per prior informal IRS guidance, was that this amount of interest would be "reasonable."

(Here's a prior discussion on IRS's informal position regarding this: http://www.irs.gov/pub/irs-tege/rne_win12.pdf )

The confusion comes in because the IRS VCP agent, by phone, is now telling me that IRS auditors, on exam, are now seeking "justification" for interest rates used on plan loans, and that we need to ensure that the rate used is what would have been commercially available. See, e.g., this mention of this topic in the IRS Retirement News for Employers - Winter 2012, that the examiner brought to my attention: http://www.irs.gov/pub/irs-tege/rne_win12.pdf )

The IRS VCP agent suggested that my clients were professionals, and I should check to see if 5.25% was the rate they would have gotten. My first thought was that she meant that 5.25% is TOO LOW.

On further reflection (and given recently low interest rates), I'm wondering if, instead, she is suggesting (albiet in code), that I should consider using a LOWER interest rate than 5.25% Because I'm thinking that an ACTUAL commercial loan would have been lower for that period. (Was she telling me that 5.25% interest was too high?!)

[QDROphile]

Isn't it a shock when the law is actually enforced in accordance with its terms rather than according to deeply entrenched industry practices? What part of the "prior informal guidance" justified use of P+2%? Did you consult with a commericial to see if similar loans would issue at that rate? Your links both go to the same document, but the text suggests you are comparing doucments. I reacall informal IRS guidance from long ago that stated that neither P+1 nor P+2 would necessarily be correct.

[BG5150]

From the 2011 IRS Phone Forum transcript:

Generally, the prime interest rate is a rate that banks only give to their very best customers and rare, very rare at that. For this reason as a general rule the Service generally considers prime plus 2% as a reasonable interest rate for participant loans, and I hope that helps you.

[BG5150]

In the OP's case: is the client supposed to call banks and say, "what would have charged me July 7, 2010 for a $4,500 loan to be paid back in two years?"?

[ERISAatty]

Oops. I meant to include this link, as well, which is to a BenefitsLink message board thread, in which posters noted hearing that Prime + 2% was the standard, per an early 2012 phone forum:

http://benefitslink.com/boards/index.php?/topic/50904-irs-says-prime-is-not-reasonable/

Actually I have now located the actual source and transcript: http://www.irs.gov/pub/irs-tege/loans_phoneforum_transcript.pdf At the bottom of page 10, they say prime + 2 is reasonable.

But in any event, it appears that the pendulum has swung back to the DOL reg standard of ensuring commercial rates, so I guess I need to go research what type of interest rate a local similar loan in 2011 would have had...

[DMcGovern]

Just curious. If you do go through the process of checking for what would be "reasonable" interest rate for each and every participant that requests a loan - how are they documenting this?

[ERISAatty]

In the OP's case: is the client supposed to call banks and say, "what would have charged me July 7, 2010 for a $4,500 loan to be paid back in two years?"?

Exactly.... this seems a bit much to ask of a plan administrator, but since I'm in an active correction, I'll do as I'm told....

[ERISAatty]

...and yes. Apparently, per DOL Reg. SEction 2550.408b-1(e) (and the examples there), calling banks is exactly what's required. ):

[shERPA]

Prime rate may be for banks "best customers" only, and indeed "very rare". But what does a bank charge for a loan FULLY SECURED by the balance of a savings account held at that bank? This is akin to what a plan loan is like, the plan has NO RISK, just like the bank making a passbook secured loan has no risk. Prime+2 seems high.

[masteff]

Conventional mortgages are fully collateralized, similar to a plan loan, so it might give you some insight into a reasonable spread above prime.

http://www.federalreserve.gov/releases/h15/data.htm

[shERPA]

I don't think mortgages are at all comparable to plan loans. Lenders have to jump through a lot of hoops and incur significant costs to foreclose on a home, and then they still bear the risk of actually selling the home for enough to make their money back. Compare this to how the plan deals with a default. The loan is an offset against the distribution. That's it. No lawyers, no delays due to borrower banruptcy filings, no notices, no evictions, no realtors, no trashing of the property, no risk that the collateral will be worth less than the loan - IOW no risk of loss to the plan at all, zip, zero, nada. Just offset and be done with it. And plan loans are typically for 5 years, and in the mortgage world short term mortgages get lower rates than 30 year mortgages.

Looking at the link you posted, looks like conventional mortgages are currently just under 4%. So even if we accept mortgage rates as a proper comparison, prime (at 3.25%) plus 1 is still too much.

I googled for loans secured by passbook accounts and found this link:

http://www.bankrate.com/finance/savings/passbook-loans-paying-to-borrow-your-own-money-1.aspx

It says such a loan is typically 3% over the rate paid on the savings account. Checking Wells Fargo, the highest rate on a savings account right now is 0.05%. A 26 month CD is 0.20%. So add 3% and you get a range of 3.05% to 3.20%. Prime is currently 3.25%. So maybe our plan loan programs should provide for a loan rate of prime LESS 0.05%!

In any case it is difficult to see how IRS can justify a prime plus 2 standard (except they have guns and the color of authority).

[ESOP Guy]

I don't think mortgages are at all comparable to plan loans. Lenders have to jump through a lot of hoops and incur significant costs to foreclose on a home, and then they still bear the risk of actually selling the home for enough to make their money back. Compare this to how the plan deals with a default. The loan is an offset against the distribution. That's it. No lawyers, no delays due to borrower banruptcy filings, no notices, no evictions, no realtors, no trashing of the property, no risk that the collateral will be worth less than the loan - IOW no risk of loss to the plan at all, zip, zero, nada. Just offset and be done with it. And plan loans are typically for 5 years, and in the mortgage world short term mortgages get lower rates than 30 year mortgages.

Looking at the link you posted, looks like conventional mortgages are currently just under 4%. So even if we accept mortgage rates as a proper comparison, prime (at 3.25%) plus 1 is still too much.

I googled for loans secured by passbook accounts and found this link:

http://www.bankrate.com/finance/savings/passbook-loans-paying-to-borrow-your-own-money-1.aspx

It says such a loan is typically 3% over the rate paid on the savings account. Checking Wells Fargo, the highest rate on a savings account right now is 0.05%. A 26 month CD is 0.20%. So add 3% and you get a range of 3.05% to 3.20%. Prime is currently 3.25%. So maybe our plan loan programs should provide for a loan rate of prime LESS 0.05%!

In any case it is difficult to see how IRS can justify a prime plus 2 standard (except they have guns and the color of authority).

You took the words out of my mouth. My credit union charges as little as 2% over CD rates which on a 2 year CD is still less then 1%. I think you can make a case for something less then prime+ if you read the rules.

[ETA Consulting LLC]

ShERPA took the words out of my mouth as well. "IF" the IRS and DOL were concerned about consistency, they would differentiate plan loans from "daily" and "balance forward" plans. Back when these rules were written, there weren't many (if any) daily plans. Under a "daily" valued plan, the concept of adequate security doesn't compute as it is automatically the "BEST" security you can have against lost to the plan. In daily, you actually "sell the other assets" directly from the participant's account in order to fund the loan. In my view, that should earn a rate better than that of the US Treasury; especially in light of recent events

Under balance forward, you're "typically" selling pooled assets to fund the loan. If the participant doesn't pay, it could affect other particpants.

Good Luck!

[MoJo]

Fascinating thread.... I used to work for a bank (Key Bank) - in their institutional trust business, supporting the daily valued 401(k) platform (a while ago). When the issue of interest rates was raised (back in the '90s), we went to the lenders at the bank, posited the scenarios, laid out all of the facts (including being "secured" by the account balance) and asked them what they would charge for similar loans. Their response? We wouldn't make such loans at any interest rate. Their rationale? 1) The collateral couldn't be "attached" until some future point in time over which they (the lender) had no control; 2) the loan was dependent upon continued employment, which could not be guaranteed, and termination of employment was defined as a condition of default (which meant far too many such loans wold be defaulted); and 3) the "available on a non-discriminatory basis" requirement meant that they had to take the lower paids (less credit worthy in their minds) along with the well heeled (desirable clients to a lender) and that meant too much "credit risk."

Bottom line: Having to "call a bank" to set interest rates (despite being burdensome) would probably not yield any results, let alone desirable results. Car loans are based on the car as collateral; boat loans on the basis of the boat being collateral; personal loans being based on the individual creditworthiness of the person, etc.... None of which is applicable in a plan loan scenario.

[K2retire]

Since when do real world complications have any bearing on IRS or DOL positions?

[shERPA]

To MoJo's point, lenders won't make such loans becuase they can't collateralize the account balance - exactly right. But the plan can do so and foreclose on it with a distribution offset - just as a bank can do with a loan fully secured by a savings account. Which is why I think savings account secured loans are the most comparable for determining rates pursuant to the regs' "similar circumstances" requirement.

[QDROphile]

Keybank was not being very helpful -- this is not a question to which there is no answer or only a negative answer.. The trick is to find a a helpful commercial lender and get support. Some lenders will provide a methodology for determinining a rate based on puublicly available information so the plan administrator is able to keep up with changing interest rate without having to consult the lender each time. The pan administrator wll have to check with the lender from time to time to make sure that the lender continues to support the methodology. When the regulators ask, the plan can give a compliant answer. An open question is whether or not a multiple-lender survey is expected, but I think an agency will back off if the plan can show support from a lender on the rate.

[MoJo]

To MoJo's point, lenders won't make such loans becuase they can't collateralize the account balance - exactly right. But the plan can do so and foreclose on it with a distribution offset - just as a bank can do with a loan fully secured by a savings account. Which is why I think savings account secured loans are the most comparable for determining rates pursuant to the regs' "similar circumstances" requirement.

There are differences. The "regulatory position" is that the loan must be on commercially reasonable terms - of which there is no analogous situation. Yes, "account collateralized" loans exist - but based on the ability to immediately attach it on default. The same is not true in a plan loan (though I understand defaulting, deeming, and actual distributions) - BUT it is a different scenario that does impact the "commercial reasonableness' which essentially means that what bankers may say is an appropriate interest rate, or what the parameters are for setting such a rate isn't necessarily complaint with that standard. In other words, the uniqueness of a plan loan makes comparisons to non-plan loans for purposes of setting interest rates to be in apt. That was the point of my original post. Regulatory perception does, in fact, bear no relationship to commercial reality, yet they seem intent on mirroring commercial practices, however inappropriate, to determine interest rates.

Allow (or require) plans to set interest rates based on the ultimate use of the use of the proceeds, and allow the plan to take a collateralized interest in the purchase and then you get "closer." Loans for matters not related to purchases (debt consolidation, or whatever) would then need to be treated as "personal loans" and credit reports, debt to income rations, and other things would need to be collected. Indeed, a dilemma exists for a plan sponsor planning a RIF - grant a plan loan knowing the person may or may not be around to pay it back?

If the IRS or DOL pursues the "commercial reasonableness" standard to the logical conclusions and employers would have to get far more involved in the financial affairs of their employee/participants requesting loans - which might not be a bad thing as it would cause plan loans to be written out of plans.

[MoJo]

Keybank was not being very helpful -- this is not a question to which there is no answer or only a negative answer.. The trick is to find a a helpful commercial lender and get support. Some lenders will provide a methodology for determinining a rate based on puublicly available information so the plan administrator is able to keep up with changing interest rate without having to consult the lender each time. The pan administrator wll have to check with the lender from time to time to make sure that the lender continues to support the methodology. When the regulators ask, the plan can give a compliant answer. An open question is whether or not a multiple-lender survey is expected, but I think an agency will back off if the plan can show support from a lender on the rate.

Actually, Key Bank was incredibly helpful. They convened an underwriting committee to evaluate the scenarios, engaged outside counsel to assist in the process (i.e. the lenders spent money on the issue), asked a lot of questions, took about 6 months to come to a conclusion, and then indicated, in a well reasoned report that such loans would be imprudent for a lender to grant, applying commercially reasonable standards, without doing a full underwriting process on each and every plan loan request - as if it were an uncollateralized personal loan.

The bottom line is that they could come up with no "commercially reasonable" equivalent analysis to value the loan - a necessary precursor to pegging the interest rate and approving the loan.

Personally, considering the account balance collateral, the relatively short term involved (5 years unless....) and the practice of payroll deduction repayments, I don't have a problem with prime plus as an interest rate. Any other analysis would require individual underwriting - which my clients would never do - even if it meant eliminating loans (which I'm all in favor of).

[QDROphile]

I can see that Key Bank was helpful with a decision not to have plan loans (whixh is not a bad thing), but I don't see any help with determining rates.

[ERISAatty]

Thanks for the fascinating responses, everyone!

I'll post again if I have any updates on IRS (or DOL, but I hope not) reactions on the interest rate issue, and/or how it goes as I try to argue to stick with my Prime + 2% calculation in the current matter. (After all, the new position on loans is of more recent vintage [2012 is the earliest as far as I know - though I may not know everything] than the Fall 2010 informal Prime+2 IRS guidance. [And yes, I realize that informal guidance can't be officially relied upon. On the other hand, it doesn't seem fair that a plan sponsor should have to incur hundreds of additional dollars in attorney's fees to sort through the interest rate issue, when they/we had already followed what we believed to be an acceptable approach for 2011].

I've obtained some historical consumer loan rates from a local bank for 2011 (the year these plan 'loans' were made), but of course, these rates were for loans not exactly analogous to a plan loan. I'd sure prefer to see the use of a safe-harbor standard (or a range). Still it's helpful for my own comparison purposes. Maybe. And I feel I've at least 'checked the box' on the apparent 'duty' to investigate commercial rates, and obtained documentation of same.

[MoJo]

I can see that Key Bank was helpful with a decision not to have plan loans (whixh is not a bad thing), but I don't see any help with determining rates.

I think you misinterpret. KeyBank was NOT evaluating whether they should have loans in their own plan (they do, in fact offer loans), but rather was evaluating HOW TO SET RATES FOR PLAN LOANS, for their retirement plans services business (Key was a bundled recordkeeper/trustee/administrator) for about 1200 plans at the time.

The lenders were asked how *they* would set rates for plans being serviced by the trust department - to which they replied, they wouldn't take such loans.

To me, that was incredibly helpful - in that it taught me that plan loans were probably NEVER "commercially reasonable" by the standards of those in the business of making commercial loans.

[QDROphile]

Perhaps I am misinterpreting. If the request was, "I am trying to determine how to set a plan loan rate and the ERISA standard is the rate a commercial elnder would charge for a loan like the plan loan," Key Bank gave a facile, narrow, formalistic answer that did not help to achieve the goal of setting an interest rate. The facile, narrow, formalistic answer could have been a legitimate prelude, accompanied by some laughter, followed by a serious answer about what interest rate should be used.

If the question was, "What would be the interest rate on a commercial loan that has exactly the characteristics of a plan loan?'" maybe you got a helpful answer. In any event you felt like it was helpful. So what did you then do about interest rates with all that help? You did not have an interest rate that you could defend by saying that in fact you had consulted with a commercial lender.

[ERISAatty]

Information is, and different perspectives are, always helpful.

It seems to me that the project of determining exactly what interest rate would have applied to the loan, had the individuals involved obtained it from a bank, cannot be determined with precision. Witness the differing views here. (And that, in itself, is helpful to know).

Part of the difficulty in determining an analogous rate relates to the required research into the creditworthiness of the specific applicants. Another rate-determining factor relates to how, exactly, the applicants planned to use the loan. In this case, the loans were related to investing in real estate. Don't know of a lot of banks, in 2011, that jumped at those. Witness the differing views here.

I question whether the loans at issue would have been underwritten by a bank at all.

Since I'm in a corrections stance with the IRS (and they understand that we're recreating wheels that should have first been created in 2011), I have the luxury of knowing, before the correction is completed, whether the IRS will or won't accept a proposed interest rate for the correction purpose. So I'm in suspense as to how those conversations will go. To date, the Agent has only raised the issue (and directed me to the Winter 2012 issue of Retirement News for Employers on the issue). She stated that IRS examiners on audit are seeking "justification" for the rates used. To my thinking, a prudent process, and evidence of having inquired as to current local bank rates, can be part of a justification. Another part can be arguments relating to how a given plan loan is or isn't like those prevailing rates.

Like I noted a few posts above, once I have an update on whether we can be allowed to stick with Prime + 2, or not, and/or what other insights I can glean from the discussion, if any.

[Belgarath]

Just a quick vent here - I see no reason why the IRS can't provide a formal Notice or whatever allowing some set rate (Prime plus 2, plus 1, plus Pi, whatever) as an acceptable safe harbor rate until such time as they formally change it, yet still allow a different rate if it is justifiable by their standards. Seems like they are being rather unreasonable on this issue.

[BG5150]

But setting standards stifles the creativity of the auditors. Who wants audits where all the same parameters must be followed?

Not me. My fees would suffer. I'd be spending a lot less time preparing for and responding to auditor requests, thus lowering my billable hours.

I think we need MORE ambiguity, not less!

[GMK]

Someone surprise me and post a link to a study, report, article, whatever, that shows that allowing loans from a Retirement plan enhances or may enhance the benefits that any participant in the plan can expect at retirement, compared to not allowing loans. (My apologies if that sounds grumpy.)

[BG5150]

GMK, I think the allowance for loans stems from a (perceived?) participation issue, rather than a benefit at retirement issue.

Offer the opportunity to have at least some access to the money and more people can be induced to participate.

Good for the employees--they are saving for retirement

Good for management--more rank & file participating, the better for allowable HCE deferral rates

Good for asset providers--more assets under management, income from fees (though that offsets the AUM)

Good for the brokers/agents--more commissions

Good for the TPA--generate fees for processing and administering loans

Good for the economy--proceeds from loans going to either pay off debt or purchase goods and services

Good for CE providers--yet another webinar they can charge for

See a downside yet? I don't.

[masteff]

Someone surprise me and post a link to a study, report, article, whatever, that shows that allowing loans from a Retirement plan enhances or may enhance the benefits that any participant in the plan can expect at retirement, compared to not allowing loans. (My apologies if that sounds grumpy.)

Challenge accepted: http://www.nber.org/programs/ag/rrc/NB09-05,%20Beshears,%20Choi,%20Laibson,%20Madrian.pdf

It appears to be primarily via the mechanism that BG notes... higher participation and deferral rates due to access to the money.

[GMK]

I agree, BG, that it's probably a perception of increased participation (as masteff has shown as I type), and I agree that more plan expenses means a boost for the economy. After all, THE issue is jobs (at least it was at election time). I look forward to reviewing the paper. Thanks, masteff.

Obviously, I think that a retirement plan is to provide retirement benefits and not for a "rainy day" fund. But others may like the added fun of issues like those addressed in this thread.

From what I read (and have seen), the surest way to high participation rates and high HCE deferral rates is to offer a safe harbor match on deferrals to, say, 5% and implement auto enrollment at the 5% deferral rate. Few people choose not to participate, and not having to determine if HCE deferrals need "correction" at the end of year reduces plan administration time .

From a fiduciary point of view, I will read the paper masteff linked to find out how loans enhance anyone's retirement benefit. I can see how a loan adds a risk of reducing the borrower's retirement benefit (money not invested, or worse, don't pay it back). If it would be prudent for a non-banker plan sponsor to hire appropriate help to set interest rates and administer loans and avoid errors (payroll deductions missed, etc.), should those expenses be paid from (reduce) participants' accounts?

Thanks, again.

[BG5150]

In a bear market, a (shorter-term) loan can be a boon, as you will repurchase shares at lower prices than originally sold.

It's a type of market timing that may or may not work out for the participant.

[shERPA]

I'm not a fan of plan loans generally, as they do introduce "leakage" into the retirement system. But for participants who are 30 - 40 years from retirement, I appreciate from their end it looks like a long time to "tie up" their money. Yes it is in their interest to do so, and all that time is on their side in terms of accumulating retirement savings, but that's not the perspective of most younger employees. And it is their money after all.

From a policy perspective a loan program is probably a reasonable compromise to help encourage retirement savings while still providing access that is not heavily penalized by taxes (assuming it is paid back timely).

[MoJo]

Perhaps I am misinterpreting. If the request was, "I am trying to determine how to set a plan loan rate and the ERISA standard is the rate a commercial elnder would charge for a loan like the plan loan," Key Bank gave a facile, narrow, formalistic answer that did not help to achieve the goal of setting an interest rate. The facile, narrow, formalistic answer could have been a legitimate prelude, accompanied by some laughter, followed by a serious answer about what interest rate should be used.

If the question was, "What would be the interest rate on a commercial loan that has exactly the characteristics of a plan loan?'" maybe you got a helpful answer. In any event you felt like it was helpful. So what did you then do about interest rates with all that help? You did not have an interest rate that you could defend by saying that in fact you had consulted with a commercial lender.

You know, I was part of that project team - as a representative from the legal department as an ERISA attorney - and I can assure you it was not a "facile, narrow, formalistic" approach subject to some laughter.

The project came about quite legitimately as a result of the OCC regulator overseeing the $80 Billion dollar bank with $120 Billion dollars in trust assets (the successor to the famed "Cleveland Trust Company" - trustee to the Rockefeller fortune (still to this day), who determined that the risk to the bank as service provider and trustee concerning compliance with loan regs was one that had to be "controlled" through a well thought out, documented investigation and process.

We spent over six months on the project, exploring every angle of the requirements, the characteristics of plan loans, similarities to commercial, corporate and personal loans, and developed a "Trust Policy" that, to this day, is part of the regulatory framework under which Key operates it's trust business.

It was a valuable process - even though the conclusion was there were no comparable loans against which to benchmark plan loan rates, and hence we justified (to the satisfaction of the OCC) to use "industry standard" rates of prime plus.

[masteff]

Of course, "we" (the retirement plan community as a whole) have allowed plan loans to reach their illogical conclusion via multiple loans and refinancings.

I think I've said it once before but the one time I personally used a plan loan (to finance some minor remodeling on the home I'd just bought), I viewed it as a piece of my portfolio and adjusted my investments accordingly. If you look at model portfolios, even the most aggressive suggest you hold a % in bonds/stable value, so I simply viewed the fixed return on my plan loan as fulfilling that %.

[QDROphile]

I stand by my comments from the perspective of a plan adminstrator and what was in the post. As an ERISA attorney, you understand that the primary function of an advisor is to solve client problems, not to come up with accademic answers. The plan admnistrator has a problem and a standard. The problem is to determine an interest rate. The standard is what a commercial lender would charge. If that is where the question is coming from, a conclusion by the bank that there is no comparable loan in the lender's normal universe is unhelpful.and all of the efforts and technical work that went into the conclusion were narrow and formalistic. I might concede "facile," but the effort missed the point and failed to do the job insofar as you described it. You did not say in your descriptions what you said in your last sentence, "we justified *** use [of] *** rates of prime plus." That is the point and that was useful, assuming that the "we" is the bank. It meant that a commercial lender had determined a rate that was reasonable to charge for a plan loan. A plan adminstrator can use that conclusion to meet the standard. If the "we" is the plan administrator, you did a fine job and made the most of inadequate service from the bank.

Also, If the question came from another angle or had another purpose, then the effort may have been brilliant and herioc. In fact, I agree with the academic conclusion. A plan loan as usually provided under 401(k) plan is an artificial anomaly that the the regulations try to dress up with some conventionality, with resulting illusions, confusion, and contradictions.

[GMK]

In a bear market, a (shorter-term) loan can be a boon, as you will repurchase shares at lower prices than originally sold.

Thanks for that, BG. I agree it could be a plus if your timing is good. Of course, the benefit is reduced, because the loan repayments are after-tax dollars (another record keeping expense and distribution complication for the plan).

Masteff - An interesting article. Seems to focus on overall results. Participation might increase. Average contributions do increase, although they do not distinguish how much of this effect is because higher paid's get to defer more.

They conclude that the positive effects of loan availability on savings rates are experienced by all participants, whereas only a few take the loans. I'm not sure what this means, but again I suspect that a major effect is that the cap on savings rates for HCE's is higher. (They don't discuss this.)

And then for the 2.5% (which seems like a big percentage) of participants who default, there's a big cut in retirement benefits and immediate taxes and often the 10% penalty.

Thanks again for the comments and the article. and have a nice day ... or else.

[ForksnKnives]

I stand by my comments from the perspective of a plan adminstrator and what was in the post. As an ERISA attorney, you understand that the primary function of an advisor is to solve client problems, not to come up with accademic answers. The plan admnistrator has a problem and a standard. The problem is to determine an interest rate. The standard is what a commercial lender would charge. If that is where the question is coming from, a conclusion by the bank that there is no comparable loan in the lender's normal universe is unhelpful.and all of the efforts and technical work that went into the conclusion were narrow and formalistic. I might concede "facile," but the effort missed the point and failed to do the job insofar as you described it. You did not say in your descriptions what you said in your last sentence, "we justified *** use [of] *** rates of prime plus." That is the point and that was useful, assuming that the "we" is the bank. It meant that a commercial lender had determined a rate that was reasonable to charge for a plan loan. A plan adminstrator can use that conclusion to meet the standard. If the "we" is the plan administrator, you did a fine job and made the most of inadequate service from the bank.

Also, If the question came from another angle or had another purpose, then the effort may have been brilliant and herioc. In fact, I agree with the academic conclusion. A plan loan as usually provided under 401(k) plan is an artificial anomaly that the the regulations try to dress up with some conventionality, with resulting illusions, confusion, and contradictions.

I could not agree more.