Loan interest rate

[ombskid]

Is 4.25% still considered reasonable for a participant loan from a 401(k) plan?

[ombskid]

Rather than 4.25% I mean prime rate plus 1%

[BG5150]

What do banks in the area (of the employer) charge for similar loans?

[masteff]

The Service has informally said that prime plus 2% is reasonable. http://www.irs.gov/pub/irs-tege/loans_phoneforum_transcript.pdf

I'd say that prime plus 1% is probably reasonable. It's commonly used and I'm not aware of wide reports of the Service dinging plans on it. In light of the conversation in the document I linked, you might do a brief write-up and put in the plan file of how you arrived at +1% (workforce composition, local lending policies, default risk, etc).

[GMK]

And there's this little previous discussion:

http://benefitslink.com/boards/index.php?/topic/53845-irs-has-a-new-position-on-plan-loan-interest-rate-anyone-dealt-with-this