February 15, 1989
TO: PENSION MEMBERS NO. 10-89
RE: IRS REVENUE RULING CONCERNING PARTICIPANT LOANS
__________________________________________________________
Attached is a copy of IRS Revenue Ruling 89-14, which
addresses the status of a participant loan at an unreasonably low
interest rate under section 401(a)(13) of the Internal Revenue
Code.
Section 401(a)(13) states that benefits provided under a
qualified plan may not be assigned or alienated. A participant
loan secured by the accrued nonforfeitable benefit of the
participant is not considered an assignment or alienation,
provided that the loan is exempt from the tax on prohibited
transactions by reason of section 4975(d)(1) of the Code. In
order to qualify for such exemption under section 4975(d)(1)(D),
the loan must bear a reasonable rate of interest.
The IRS noted that a participant loan must bear a
reasonable rate of interest, even where the participant is not a
disqualified person under section 4975(e) of the Code, in order
to avoid violation of section 401(a)(13). The ruling request
apparently stipulated that the loan was made at an unreasonably
low interest rate. Accordingly, the IRS held that the benefits
were assigned or alienated in violation of section 401(a)(13).
We will keep you informed of further developments.
Kathy D. Ireland
Assistant General Counsel
Attachment