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Business Guidance

Paycheck Protection Program (PPP) and Retirement Plans

4 minute read time

The overall requirements of the Small Business Administration’s Paycheck Protection Program (PPP) have been extensively discussed since it launched in early April. This article is intended to help employers understand how employer contributions to retirement plans can be covered under the PPP.

Purpose of the Program:

The PPP loan program is designed to, “help businesses keep their workforce employed during the Coronavirus (COVID-19) crisis.”

Generally, the loans are designed to be forgivable as long as employees are kept on the payroll for the “covered period” of 24 weeks after the money is received. The money is to be used for payroll, rent, mortgage interest, or utilities. At least 60% of the forgiven amount should be used on payroll related items.

Key facts for retirement plan related expenses:

  • Retirement plan costs are eligible for forgiveness during the 24 week “covered period”
  • Costs are those that are paid or incurred in the “covered period”
  • Costs that are incurred but not paid until the pay period following the end of the “covered period” are generally still eligible (bi-weekly or more frequent payrolls only) 
  • Eligible costs are described on the application form as “employer contributions to employee retirement plans”

What expenses for retirement plans are allowable?

  • Retirement plan expenses can be any of the following:
    • Employer matching contributions
    • Employer profit sharing contributions
  • Amount is capped at $100,000 per employee 
  • Amount is capped at $15,385 for sole-proprietors or owner-employees (this is a single cap for all payroll expenses; retirement plan contributions made above this amount cannot be counted towards forgiveness)

What retirement plan expenses are not allowable?

  • Employee salary deferrals – pre-tax and Roth 
  • Employee after-tax contributions

A number of organizations have been seeking clarification about permissible contributions that may be funded with PPP loan amounts. The following is a listing of more recurring questions and answers.

Any match earned during the covered period can be paid and counted for purposes of PPP loan forgiveness towards retirement plan expenses. If the participant has not yet made the deferrals (i.e., deferrals that will be made via payroll deduction in pay periods after the covered period), then the match has not yet been earned and so cannot be used for PPP permissible purposes.

As indicated above, only matching contributions that have been earned during the covered period can be paid during the covered period. If the plan has a last day or 1,000 hours requirement then you can do one of two things by plan amendment:

  • Remove the requirement for 2020 only 
  • Deposit the incurred match contributions to a holding account for later allocation. The account must be in the name of the plan and trust and must be for the sole use of the plan and trust. Be careful not to overfund the anticipated amount due to the Prohibited Transaction rules, which would apply. These rules prevent amounts from reverting back to the employer from the trust.

Based upon current guidance, if the 2019 annual employer contribution is paid during the covered period you can count that amount towards retirement plan expenses for purposes of the PPP forgiveness application.

Based upon current guidance, the contribution could be paid during the covered period, however, the amount contributed would be subject to final non-discrimination testing at the end of the plan year.

If the amount cannot be allocated during the covered period, the funds can be deposited into a holding account explicitly for the use of the retirement plan and trust. See above note regarding Prohibited Transaction rules.

If the plan is amended to include an additional employer contribution, then one could be determined and paid during the covered period.

If the plan is amended for an additional contribution amount or type, then one could be determined and paid during the covered period. Please note that required Safe Harbor notice rules must be followed with distribution to eligible employees.

Yes, any employer contribution restrictions can be removed for 2020. This allows any employer contributions that have been earned during the covered period to be funded with PPP amounts during the covered period.

Any Safe Harbor non-elective that has been earned through the covered period can be paid in the covered period to qualify for forgiveness. There is no last day requirement for Safe Harbor non-elective contributions. You will need to take additional steps and coordinate with your plan advisor to allocate the contributions appropriately.

Your plan can be amended to allow for an additional contribution amounts during the covered period. Please note Safe Harbor notice requirements must be followed and distributed to eligible employees.

If the plan document is amended to allow for additional contributions to be earned and contributed during the covered period, then they can be paid and counted towards forgiveness expenses under the PPP. Those additional amounts are subject to annual non-discrimination and limits testing.

For additional questions, we encourage you to contact your Johnson Financial Group Advisor or your plan provider.

This information is accurate as of the date of June 20, 2020. Johnson Financial Group does not provide legal or tax advice.