Skip to main content

McKinley Carter Receives '2023 Best Places to Work' Award from InvestmentNews

Loan Interest Rates

What is an appropriate interest rate for plan loans?

Photo of author, Monica Garver, CPA, CFP®, AIFA®, CDFA®.
Monica Garver, CPA, CFP®, AIFA®, CDFA®
Director of Retirement Plan Services and Financial Strategist

Both, ERISA and the IRS requires that DC plan loans reflect a “reasonable rate of interest”.

DOL Reg Section 2550.408b-1 states that “a loan will be considered to bear a reasonable rate of interest if such 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.” A pre-existing DOL Advisory Opinion, 81-12A, suggests that plan sponsors should align their plan interest rate with the interest rate banks utilize.

The IRS has a similar requirement where they informally state that the Prime Rate plus 2% would be considered to be a reasonable rate. Some plans use the Prime Rate plus 1%, or a rate based on the Moody’s Corporate Bond Yield Average.

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

Related Insights
Prudence

Dear Prudence: What is Prudence Anyway?

When it comes to monitoring and selecting investments, the responsibility lies with the ERISA fiduciary for managing your company’s 401(k) plan, and this means the fiduciary is subject to ERISA’s prudent man rule (sometimes referred to as the “prudent expert rule”). What exactly is a prudent expert?

Read More
Reshuffle

The Retirement Reshuffle Is Impacting Plan Sponsors

Across the nation, more and more workers are expecting to postpone retirement. And delays don’t just affect employees — more than a third of employers are concerned about increased health and benefit costs, negative impacts on their staff’s mental health and barriers to hiring new talent.

If you sponsor a retirement plan, you’re already doing something important to encourage employees to retire comfortably and on time. However, while 68% of American workers have access to a 401(k), only 41% are actively contributing to it. Working with your advisor can help you design the right benefits package for your organization. Learn more.

Read More
SSN

Without Congressional Action the Social Security Trust Funds will be Exhausted in 2034

If current trends continue, the Social Security trust funds will be completely depleted in 2034. This is according to the most recent annual report published by the Trustees of Social Security. This is one year sooner than was projected in last year’s report. Find out more.

Read More
Play