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‘Reasonable Interest Rate’ Debate Continues

March 5, 2012 – 7:30 pm | By James Proescholdt | No comments yet

Employers and plan administrators will be better able to administer plan loans and meet the prohibited transaction exemption, since the IRS has given them a clearer picture of what constitutes a “reasonable rate of interest.” The IRS has provided this assistance in guidance it published in the Winter 2012 edition of its “Retirement News for Employers.” The guidance came roughly five months after an IRS phone forum on plan loans, during which two IRS employees off-handedly stated that the service generally considers “prime plus 2 percent” to be a reasonable rate of interest. At the time, many plan loan programs used an interest rate of less than prime plus 2 percent, so the remark led many plan administrators to question whether they should adjust their rates. While the remarks during that September phone forum were unofficial, this latest guidance from the IRS comes with the full weight of the service’s authority. However, while the IRS did not address which specific interest rate(s) it considers ideal, it did provide methods on the best way to calculate a reasonable interest rate for a plan, as well as three examples illustrating them. In its newest guidance, the IRS quoted the Department of Labor (DOL) Reg. §2550.408b-1(e):

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.

To determine if a participant loan interest rate is reasonable, the IRS instructed, plan administrators should ask two questions:

1. What current rates are local banks charging for similar loans (amount and duration) to individuals with similar creditworthiness and collateral?
2. Is the plan rate consistent with the local rates?

Another resource to consider in determining a reasonable rate of interest for a plan is the daily summary of prime rates, to which the IRS said it regularly refers. Determining a reasonable rate of interest is imperative for plan loans — they must do so in order to meet the prohibited transaction exemption under Code Section 4975.

Cars, Trucks and Vans: Deduction Limits Out for 2012

March 5, 2012 – 7:07 pm | By Dan Macy | No comments yet

[caption id="attachment_3263" align="alignleft" width="300" caption="Photo: Dan Macy"][/caption] Employers will now be able to calculate the depreciation of vehicles — passenger cars, trucks and vans that they provide to employee as a fringe benefit — that they first put into service in calendar year 2012, since the IRS has released the new depreciation deduction limits. Revenue Procedure (Rev. Proc.) 2012-23, released March 4, sets depreciation deduction limits for vehicle owners, and inclusion amounts for lessees. Since 1988, the IRS has adjusted both figures for inflation annually. Passenger Car Limit Unchanged This year, the IRS did not change the threshold at which it requires lessees to start applying the inclusion amounts on passenger cars. Lessees must begin applying the inclusion amounts on passenger cars with an FMV of $18,500. Trucks and Vans Limit Unchanged The IRS also left unchanged the threshold at which it requires lessees to start applying the inclusion amounts on trucks and vans; that is, at an FMV of $19,000 or higher. Depreciation Limits Up Since 2003, the IRS has calculated the inflationary adjustments for passenger cars and trucks and vans using a consumer price index (CPI) “automobile component” and the CPI “truck component” for trucks and vans, as required by Code Section 280F. For some vehicles, a “bonus” depreciation applies. Passenger Cars For vehicles to which a bonus depreciation does not apply, the limit is $3,160 (up from $3,060 in 2011) for passenger cars (see Rev. Proc. 2012-23, Table 3). Trucks and Vans Trucks and vans to which a bonus depreciation does not apply have a 2012 limit of $3,360 (up from $3,260 in 2011; see Rev. Proc. 2012-23, Table 4.) Tables 3 and 4 of Rev. Proc. 2012-23 also provide the depreciation deduction limits for successive years.