I called Merrill Lynch to see if they could specify that the loan is "secured by amounts not attributable to elective deferrals" (i.e., loan comes from employer contributions only. See IRC Sec. 72(p)(3)(B)(ii)). ML said they couldn't specify that, but you might check with your plan administrator as it may differ depending on the administrator. IMO if you cannot get your plan administrator to confirm that the loan is secured by non-elective deferrals, it taints all the interest expense and none of it can be treated as deductible regardless of what the proceeds are being used for. If your administrator can specify the source of the loan is from employer contributions only, I think general tax rules apply which means the interest could be deductible if the tracing rules are met and the proceeds are used in connection with a business.
