adjustable loan interest rate

because the participant loan will be used to purchase a principal residence, can you use an adjustable interest rate? Just because the interest rate is to be established at the time of the loan, to me that does not necessarily mean you can't use an adjustable rate because the adjustable rate would be established at the time of the loan. any thoughts? Anyone seen this before? 

The Labor department’s rule states: “A loan will be considered to bear a reasonable rate of interest if [the] loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” 29 C.F.R. § 2550.408b-1(e) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(e).

And that might be a nonexclusive way to meet the statutory prohibited-transaction exemption’s condition that a participant loan “[b]ear a reasonable rate of interest[.]” 29 C.F.R. § 2550.408b-1(a)(1)(iv) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(a)(1)(iv).

But even if ERISA § 408(b)(1) tolerates an adjustable-rate participant loan, is the administrator’s service provider capable of accounting for it?

20 hours ago, Peter Gulia said:

But even if ERISA § 408(b)(1) tolerates an adjustable-rate participant loan, is the administrator’s service provider capable of accounting for it?

A great point!

16 minutes ago, Belgarath said:

A great point!

I suspect that this would have to be manual adjustments which makes a hard no for me 

I thought loans had to be a level payment..?? Unless refinancing or replacing.

I went to 72(p)(2)C:

"Except as provided in regulations, this paragraph shall not apply to any loan unless substantially level amortization of such loan (with payments not less frequently than quarterly) is required over the term of the loan."

How can an adjustable rate loan be level with an adjustable rate?

That § 72(p)(2)(C) condition calls for the amortization, not necessarily the payments, to be level.

It might be possible for an amortization to remain level even while periods’ payments vary if each payment is enough to extinguish the period’s accrued interest and to pay the constant portion of the principal.

Black’s Law Dictionary (12th ed. 2024) defines amortization as “[t]he act or result of gradually extinguishing a debt . . . , usually by contributing payments of principal each time a periodic interest payment is due.”

That definition’s subentry defines negative amortization as “[a]n increase in a loan’s principal balance caused by [periodic] payments insufficient to pay accruing interest.”

An adjustable-rate loan sometimes changes what interest is due under the loan’s terms.

If every payment is enough to satisfy the then due interest, the amortization might be level.

We might never know whether a loan with interest adjustments meets the § 72(p)(2)(C) condition because, as noted above, recordkeepers and third-party administrators don’t offer services regarding such a loan.

This is not advice to anyone.