Reasonable loan interest rate for 1-person plan

One person plan, never hired anyone, no intention to hire anyone, so he is the only participant in his plan. He would like to take out his first loan. I recommended interest rate of prime as reasonable. He wants to know if he can take the loan with zero interest. Is that possible? If not, I've never used a rate below prime, is there something, ie prime-1?

A recent discussion that might be relevant to your Q: 

https://benefitslink.com/boards/index.php?/topic/63283-inerest-rate-for-pension-loans/

Could he get that rate from a bank, even as a preferred customer?  No.  So the answer is no.  Prime might be ok but it's not a debate I'd want to have every time someone decided to take a loan...the time to make that decision is when loan provisions are added to the plan, as part of the loan policy.  If you're just doing that now, well fine then, but I don't think there is any debate that 0% interest is not reasonable.

Thank you david & Bird.

Interestingly, the owner is asking (legally) for a residential 30-year loan from the plan.  Such rates are lower than short term personal loans outside of the plan.  In this case, I'm wondering if going with Prime might be more acceptable than otherwise.

If this plan is not ERISA-governed, one might think mostly about tax treatment (but also at least some about avoiding a self-dealing transaction under a relevant State’s trust law and IRC § 4975).

26 C.F.R. § 1.72(p)-1 begins with an assumption that a participant loan treated as not a distribution must have an interest rate and repayment terms that are “commercially reasonable”.  One doubts a tax practitioner should advise a client that zero interest fits the rule’s meaning.

On questions about what interest is enough (and not too much), is it mostly a question about how much risk the one participant is comfortable with?

He should also know that solo plans with loans are an IRS audit magnet (if the plan has assets sufficient to file).

1 hour ago, CuseFan said:

He should also know that solo plans with loans are an IRS audit magnet (if the plan has assets sufficient to file).

Thank you CuseFan for this important information.

No interest deduction unless secured by the property.  Also, must be "qualified residence".  Might gum up a lender's willingness to lend.  Just a thought.