Many have questioned how much of retirement plan contributions paid with PPP loans can be forgiven. On August 4, 2020, the Small Business Administration resolved one big question when it issued the latest FAQs on PPP Loan Forgiveness.
This is timely since the deadline for making 2019 deductible contributions for S corporations is September 15, 2020 and for C corporations the deadline is October 15, 2020.
Loan Forgiveness Provisions
Here are the basics of the PPP and loan forgiveness provisions as we know them today. PPP loans were to pay for (1) payroll costs, (2) rent or mortgage payments, and (3) utilities payments. Payroll costs included all forms of wages including bonuses and commissions (limited to $100,000) as well as payments of payroll taxes, health insurance, and retirement plan contributions. One could apply for a PPP loan for the equivalent of 2.5 months’ worth of these annualized costs based on the preceding year.
The Covered Period during which loan proceeds must be spent to be eligible for full loan forgiveness has been extended from 8 weeks to 24 weeks. Borrowers that received their loan prior to June 5, 2020, may elect to use the 8-week Covered Period or the 24-week Covered Period. The Covered Period is measured from the date that the PPP loan was disbursed. Alternative Covered Periods for different payroll frequencies are beyond the scope of this article.
There are several rules governing how much of these costs could be forgiven. To be eligible for forgiveness of the full PPP loan amount, a borrower must spend at least 60% of the loan proceeds on payroll costs. Only employer contributions, not employee salary deferral or employee after-tax contributions, count as forgivable payroll costs.
A borrower’s loan forgiveness will be reduced for reductions in Full Time Equivalent employees (FTEs) or for a reduction in the salary of any employee earning $100,000 or less during 2019, by more than 25%.
If a borrower hires back previously laid off FTEs before December 31, 2020, the percentage of the loan that can be forgiven will increase.
Retirement Plan Contributions
The previous guidance for what retirement contributions are considered payroll costs that are eligible for loan forgiveness is summarized in the first sentence of the answer to FAQ 7 of the August 4th SBA FAQs: “Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period…qualify as ‘payroll costs’ eligible for loan forgiveness.”
Now under the FAQs we have learned that the SBA has put an end to any attempt to make retirement plan contributions during the Covered Period if they are attributable to periods after the Covered Period.
But, that leaves questions about 2019 vs. 2020. Can retirement plan contributions for a 2019 plan year paid in 2020 during the Covered Period be forgiven? The FAQ rules could be interpreted to provide that 2019 employer contributions paid during either the 8-week or the 24-week Covered Period can be forgiven. However, the PPP EZ Loan Forgiveness application form limits the forgiveness of employer retirement contributions on behalf of owner-employees to 2.5 months of their 2019 contribution amounts.
What about contributions for a 2020 plan year? The rules can be read to allow paying 2020 employer contributions that accrue before and during the Covered Period to be forgiven. Once again, the PPP EZ Loan Forgiveness application form limits the forgiveness of employer retirement contributions on behalf of owner-employees to 2.5 months of their 2020 contribution amounts.
What about retirement contributions accrued for periods after the Covered Period? The previous guidance and applications for loan forgiveness stated that contributions for retirement plans that are paid or incurred during the Covered Period were forgivable. It was ambiguous enough that one could make a good faith argument that you could pay now for future employer contributions outside of the Covered Period and have those payments be forgiven. In its latest FAQs, the SBA has made it clear that this is not allowed.
The last sentence of FAQ 7 states that “Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period….” The meaning of “accelerated” is not explained in the FAQs. However, one can easily and conservatively conclude from the context that the SBA means to prohibit attempts to contribute to retirement plans during the Covered Period for benefits accrued after the Covered Period.
However, if you pay for 2020 employer contributions for periods that fall within the 24-week Covered Period, you can make those contributions now and have them count as forgivable payroll costs. It appears from all of the SBA guidance that if you determine that retirement contributions for 2020 were accrued ratably throughout the year, conceivably one could pay and have forgiven that proportion of 2020 retirement plan contributions that relate to 2020 up through the date of the contribution during the Covered Period.
Not all retirement plans are alike in how these determinations and calculations can be made. For guidance on interpreting the SBA rules and forms, let’s start a conversation.