Here is your latest FYI: Employee Benefits
Update from Cindy Van Bogaert, Partner and Chair of the Employee
Benefits Practice Group at Boardman Law Firm LLP.
This FYI discusses an issue that affects participant loans offered under ERISA
qualified plans. Loans are not a required feature for retirement plans, but loans
are common. Some participants may view loans chiefly as a way to take money out
of the plan, but the loan also represents an investment of their plan assets.
The repayment of the loan to the participant must reflect a reasonable rate of
interest.
It is important to know that the Department of Labor ("DOL")
regulations provide that participant loans may result in a prohibited
transaction unless a reasonable rate of interest is assessed.
It is common for employers to use a variation of prime rate (e.g.,
prime +1, prime +2) for their rates of interest, but use of prime
rate is not specifically condoned by the DOL regulations. Rather, the DOL provides
that 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. The
regulations provide only a few examples of how to proceed and comments
in the preamble to the regulations discuss the effect of a national
versus regional plan. Although the regulations provide relatively
few details, there are some steps that might help an employer establish
that it acted prudently in setting interest rates.
What should employers do? Consider the following steps:
- Contact local banks to see what rates are being charged for
loans of similar amount and duration for individuals of similar
creditworthiness and with similar collateral.
- Analyze whether the plan rate is consistent with the local
rates.
- If changes are needed, modify and document in accordance with
plan procedures and make appropriate disclosures.
- Resolicit and review information about rates on a regular basis.
- Keep documentation to show what steps were taken.
Note also that the Servicemembers Civil Relief Act addresses maximum
rates for certain individuals and presents special issues. If an
individual with a loan goes on military leave, employers should
discuss the legal issues with their plan counsel.
This FYI is not legal advice. Individuals should seek advice based
on their particular circumstances from their own counsel. Nothing
in this FYI is intended to be used, and no information can be used,
for the purpose of avoiding penalties under the Internal Revenue
Code, or promoting, marketing, or recommending to another party
any transaction or matter addressed in this FYI.
If you have any questions or need assistance, please contact Cindy
Van Bogaert at (608) 281-7543 or cvanbog@boardmanlawfirm.com.
Would you like to have FYI: Employee Benefits Update sent
directly to your e-mail inbox? If so, please send your request,
with e-mail address, to Cindy Van Bogaert at cvanbog@boardmanlawfirm.com. |
