Is it true that a rate of replacement loan is used when refinancing a participant loan?

When refinancing a participant loan in a 401(k) plan, it is indeed true that a rate of replacement loan may be utilized. This practice aligns with the typical procedures surrounding participant loans, which often allow for new loans to be issued under specific terms that can include a rate of replacement loan.

A rate of replacement loan typically refers to the interest rate that is applied to the new loan when it replaces an existing one. This can be especially relevant if the existing loan is being modified or if a new loan is sought to pay off the old loan. Using a rate that reflects current market conditions can ensure that the terms remain attractive to the participant while also adhering to plan provisions.

The correct choice indicates an understanding that refinancing options can involve specific financial metrics and conditions related to the interest rate, ensuring both compliance with IRS regulations governing loans from qualified plans and protecting the financial interests of the borrower within the plan framework.