Rev. Rul. 89-14

1989-1 C.B. 111, 1989-6 I.R.B. 6.

                       Internal Revenue Service

                                 Revenue Ruling

                      EMPLOYEE LOANS AT LOW INTEREST RATES

                          Published: February 6, 1989

26 CFR 1.401(a)-13: Assignment or alienation of benefits.

  Employee loans at low interest rates. A loan to a qualified plan participant that is secured by the participants accrued nonforfeitable benefit constitutes an assignment or alienation if the loan is made at an unreasonable interest rate.

  In 1989, a participant in a qualified plan obtained a loan from the plan's trust at an unreasonably low interest rate. The loan was secured by the participant's accrued nonforfeitable benefit under the plan, the value of which was greater than the amount of the loan.

  ISSUE. At issue is whether the loan constitutes an assignment or alienation of plan benefits in violation of section 401(a)(13).

  HOLDING. The Service has held that the loan constitutes an assignment or alienation of plan benefits in violation of section 401(a)(13) because the loan was made at an unreasonably low interest rate.

  ANALYSIS. Generally, the Service said, a loan from a plan's trust to a plan participant will not be treated as an assignment or alienation as long as the loan is exempt from the section 4975 prohibited transaction excise tax. Taxable prohibited transactions, it noted, do not include loans to disqualified persons, who are participants or beneficiaries, as long as the loans bear a reasonable rate of interest. Finally, the Service said, regulation section 1.401(a)-13(d)(2)(iii) provides that, 'if the loan is made to a participant or beneficiary who is not a disqualified person, the loan must be one which would be exempt from the tax imposed by section 4975 by reason of section 4975(d)(1) if the loan were made to a disqualified person.' Thus, under the regulation, the participant's loan may not bear an unreasonably low interest rate, even though the borrowing participant is not a disqualified person.

  The Service emphasized that its ruling does not consider whether the loan violated the section 401(a) 'exclusive benefit' rule or constituted a distribution under section 72(p).

  The principal author of this ruling is Gretchen Young of the Employee Plans Technical and Actuarial Division; she may be reached at (202) 566-3148. For further information on the ruling, contact the Employee Plans Technical and Actuarial assistance service at (202) 566-6783/6784.

ISSUE

  Whether the benefits of a participant in a qualified plan have been assigned or alienated in violation of section 401(a)(13) of the Internal Revenue Code where the accrued nonforfeitable benefits of the participant were used as security for a loan from the plan's trust to the participant at an unreasonably low interest rate.

FACTS

  The employer maintains a plan qualified under section 401 of the Code. The plan provides that a loan from the plan's trust to a plan participant may not exceed the participant's accrued nonforfeitable benefit under the plan. The individual's account is the security for the loan. The plan provides that such a loan is available to all participants on an equivalent basis and is not made available to highly compensated employees in an amount greater than the amount available to other employees.

  In 1989 A, a participant in the plan, borrowed 100x dollars from the trust of the plan at an unreasonably low interest rate. The loan was secured by A's accrued nonforfeitable benefit under the plan, the value of which was greater than 100x dollars.

  A was not a disqualified person within the meaning of section 4975(e)(2) of the Code.

LAW AND ANALYSIS

  In general, section 401(a)(13) of the Code states that benefits provided under a qualified plan may not be assigned or alienated. However, a loan from the trust of a plan to a participant secured by the accrued nonforfeitable benefit of the participant shall not be treated as an assignment or alienation, provided the loan is exempt from the tax imposed by section 4975 by reason of section 4975(d)(1).

  Section 4975 of the Code imposes an excise tax on prohibited transactions between a qualified plan a disqualified person. Section 4975(d)(1) provides that the term 'prohibited transaction' does not apply to any loan by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan satisfies certain requirements, including the requirement that the loan bear a reasonable rate of interest.

  Section 1.401(a)-13(d)(2)(iii) of the Income Tax Regulations states that, if the loan is made to a participant or beneficiary who is not a disqualified person, the loan must be one which would be exempt from the tax imposed by section 4975 by reason of section 4975(d)(1) if the loan were made to a disqualified person.

  The loan from the plan to A must satisfy the requirements of section 4975(d)(1) even though A is not a disqualified person. Since the rate of interest on the loan was not reasonable, the use of A's accrued nonforfeitable benefit constitutes an assignment of A's benefits.

HOLDING

  The participant's benefits under the plan were assigned or alienated in violation of section 401(a)(13) because the accrued nonforfeitable benefits of the participants were used as security for the loan from the plan's trust to the participant at an unreasonable rate of interest.

  This revenue ruling only deals with the issue whether, under the above facts, the participant's benefits under the plan were assigned or alienated in violation of section 401(a)(13) of the Code. It does not deal with other issues, including the question of whether the loan also violated the requirements of section 401(a) of the Code that the plan be for the exclusive benefit of the employer's employees or with whether the loan may be treated as a distribution under section 72(p).

DRAFTING INFORMATION

  The principal author of this revenue ruling is Gretchen Young of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue ruling, please contact the Employee Plans Technical and Actuarial telephone assistance service between the hours of 1:30 p.m. and 4:00 p.m. Eastern Time, Monday through Friday on (202) 566-6783/6784 (not a toll-free number). The telephone number of Ms. Young is (202) 566-3148 (not a toll-free number).

Rev. Rul. 89-14, 1989-1 C.B. 111, 1989-6 I.R.B. 6.