401(k) loan interest rate and how do employees on straight commission pay back their loan if sometimes they get no pay?

[RayJJohnsonJr]

Hi All.  What is a good standard today to establish a fixed interest rate for 401(k) loans? The Plan is just now adding loan availability.   Prime rate + x?  5 year Treasury + X?

And, If employees are on straight commission, and sometimes receive no paycheck, how would  we handle loan payback?

Thanks, all,

Ray

[GMK]

1. Interest rates are discussed regularly here. Use the Search function.

2. Loan payback policy is up to the Plan Sponsor and, from previous discussions, I believe it has to provide some assurance that the payments will be made.  Perhaps check with a banking expert on this.

3. To me, the availability of loans from a RETIREMENT plan that does not have banking expertise is like a roaring flame 3 feet high.

 

[Belgarath]

Most documents offer an option to pay by check, as well as by payroll deduction. So for your commissioned salesperson, just allow payment by check.

[TPAJake]

The Document may allow it, but some providers do not allow direct bill, only payroll deduct. I don't like direct bill anyway, the loan is a plan asset & I don't trust Participants that much.

[K2retire]

If the recordkeeper won't take a payment directly from the participant, he or she could give a check to the employer to deposit along with their regular deposits.

[RatherBeGolfing]

18 minutes ago, K2retire said:

If the recordkeeper won't take a payment directly from the participant, he or she could give a check to the employer to deposit along with their regular deposits.

Yep, that is how we handle non-payroll loan payments to John Hancock. Participant cuts check to ER, ER cuts check to JH and everyone is happy.

[RayJJohnsonJr]

Great, because this is a JH case and that's what we're going to do. Participant writes check to ER.  ER remits.  Bodda-bing-bodda-boom.

We concluded that Wall St. Journal Prime Rate + 1% is an appropriate interest rate.

Thanks everybody, your experience and wisdom is greatly appreciated.

[MWeddell]

Be aware that there is some very informal and rather spurious IRS guidance opining that prime rate + 2% or higher interest rate is deemed acceptable for loans.  I would disclose it to the client.