How Does the Payment of Retirement Benefits Affect PPP Loan Forgiveness?
For many organizations affected by the COVID-19 pandemic, the Paycheck Protection Program (PPP) has provided necessary relief that has allowed workers to remain on the payroll and businesses to continue. Loan forgiveness is a major benefit of the PPP, but it can also be a challenge to understand how it relates to your organization. For many, the confusion is generally related to payroll costs, particularly the portion of payroll costs related to the “payment of any retirement benefit”.
Defining Payroll Costs
The PPP has two primary concepts: (1) the determination of the loan amount and (2) the determination of loan forgiveness. The amount of the loan is dependent on certain costs, including payroll costs, rents, mortgages and certain utilities. Payroll costs include the cost of certain employee benefits, including any cash contributions made to retirement plans in 2018 or 2019. Actual payroll is limited to $100,000 per individual, but retirement plan contributions are not applied toward this cap.
For corporations (including an S-Corp, PC or LLC taxed as a corporation), retirement plan benefits are relatively simple; take the total amount contributed during 2019 to a retirement plan and multiply by 2.5/12. It doesn’t matter what kind of retirement plan – defined benefit or defined contribution – and separately, it doesn’t matter if the plan was a defined benefit quarterly or minimum excess contribution or if it was a match, profit sharing or QNEC.
Sole Proprietors and Partnerships
For sole proprietors or partnerships, retirement plan benefits become a little more complicated. Essentially, the retirement costs for sole props and partners are subject to the $100,000 pay limit, but the retirement contributions for staff (appearing on the Schedule C for sole props and 1065 for partnerships) are counted and again multiplied by 2.5/12.
"Payment of Any Retirement Benefit"
How is loan forgiveness calculated? Everyone seems to disagree on how "payment of any retirement benefit" fits here. The PPP determines that recipients are eligible for forgiveness of indebtedness on a covered loan in an amount equal to “the sum of the following costs incurred and payments made during the covered period”:
- Payroll costs (which includes “payment of any retirement benefit”)
- Any payment of interest on any covered mortgage obligation (which shall not include any pre-payment of or payment of principal on a covered mortgage obligation)
- Any payment on any covered rent obligation
- Any covered utility payment
So where does the "payment of any retirement benefit" fit within the PPP definition of payroll cost? The main issue with determining that lies in the interpretation of "costs incurred and payments made during the covered period". To some, these ‘costs’ would include any cost incurred during the covered period as well as any payments made during the covered period. With this interpretation, any cash payment to a retirement plan during the eight weeks following the loan would count as a payroll cost, eligible for loan forgiveness without any kind of proration. This would include both 2019 and 2020 contributions made during the eight week period. Further, any contribution incurred during the period would also count regardless of when paid such as the match accrued for the eight week period.
To others, an expense would have to be both incurred and paid inside the eight weeks to be eligible. One law firm noted that “retirement plan contributions should include employer matching, nondiscretionary or profit sharing contributions made with respect to the eight week period to the extent an employee has a right to the payment (whether under a qualified or nonqualified plan), but likely will not include (i) employee contributions that require the employee to remain employed with the employer on the last day of the plan year or (ii) accruals under a defined benefit plan”.
Others have suggested that any discretionary contribution made during the period cannot be counted as it is not incurred, and that only matching contributions made by the formula in the plan document, attributable to the covered period and paid in the cover period, would be counted. Some employers have amended their plans to directly incur a portion of their contribution during the covered period.
More Guidance is Needed
While the Treasury Department and the Small Business Administration (SBA) have been quick to issue guidance on how to obtain the loans, the existing guidance is virtually silent as to loan forgiveness. It is important to understand that any misinterpretation could lead to contributions funded with the PPP loan not being eligible for forgiveness, forcing the employer to raise capital to fund PPP eligible payroll costs inside the eight week window or to repay the loan. Therefore, it is crucial that the Treasury and/or the SBA issue guidance directly relating to loan forgiveness. It is recommended that employers wait a few weeks for the expected guidance rather than making deposits in the hope that they qualify for PPP forgiveness.
If you have questions, comments or concerns about your organization's retirement plan, please contact: www.cbiz.com/retirement
CBIZ Retirement Plan Services is a trade name under which certain subsidiaries of CBIZ, Inc. (NYSE Listed: CBZ) market investment advisory, investment management, third party administration, actuarial and other retirement plan services. Investment advisory and investment management services offered through CBIZ Investment Advisory Services, LLC, SEC Registered Investment Adviser. Investments, investment advisory and investment management services may also be offered through CBIZ Financial Solutions, Inc., Member FINRA, SIPC and SEC Registered Investment Adviser, dba CBIZ Retirement Plan Advisory Services. Third party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.