Suspended Loans Require Interest (Posted October 8, 2004) Technical Tip 130: The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: I have learned that at least one recordkeeper does not accrue interest on loans during periods of no payment (suspension of loan payments). Is this okay? Response: No, it is not okay. Interest on the outstanding loan balance must continue to accrue during the suspension period. Comment by the RLR&C ERISA attorneys: Treas. Reg. Section 1.72(p)-1 Q&A -9 provides that loan repayments may be suspended for up to one year while the participant is on an employer approved leave of absence. However the loan must be repaid upon return to work, including interest at the rate shown on the loan document which accrued during the leave. Moreover, if a participant is performing service with the Military, the loan may be suspended during the entire period of such military service even thought such service is more than one year.. Upon return to work, the loan must be repaid with interest. However, if the interest rate on the loan is more than the maximum rate permitted under the Soldiers and Sailors Civil Relief Act, then it shall be reduced to such rate during the period of military service. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.