Both ERISA and the IRS require DC plan loans to reflect a “reasonable rate of interest”.
DOL Reg Section 2550.408b-1 states, “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 plan sponsors should align their plan interest rate with the interest rate banks utilize.
The IRS has a similar requirement where they informally state the Prime Rate plus 2% would be considered 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. Contact a KerberRose Trusted Retirement Advisor with questions.