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What Is an Appropriate Interest Rate for Plan Loans?

By:
CG Financial Services
Date:
February 10, 2022
Classification
Executive Benefits · Article

Review the Department of Labor’s fact-specific standard for documenting a reasonable interest rate on participant retirement-plan loans.

Historical insight — Originally published February 10, 2022. Preserved as historical content; information may have changed.

For an ERISA-covered participant loan to qualify for the statutory prohibited-transaction exemption, it must bear a reasonable rate of interest. Department of Labor regulations treat a rate as reasonable when the plan’s return is commensurate with rates charged by commercial lenders for similar loans under similar circumstances.

The standard is fact-specific. The Department of Labor has not established a universal “prime plus” safe harbor; plan fiduciaries should compare relevant commercial-loan rates and document why the selected rate is reasonable.

Plan sponsors should document justification for the plan loan interest rate selected.

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