The CARES Act allows forgiveness of costs incurred and payments made for “payroll costs” during the covered period—the 8-week period beginning on the date the lender makes the first disbursement of the PPP loan to the borrower. Payroll costs are (1) used to determine the loan amount for which qualifying businesses are eligible and (2) are considered qualifying costs for which loan funds may be used and on which their forgiveness is based.
The Treasury Department issued interim FAQ guidance (pdf) stating “payroll costs” will include employer contributions to both defined contribution plans (e.g., 401(k) plans) and defined benefit plans. Furthermore, these employer contributions are not counted towards the $100,000 cap on employee compensation to be taken into account as a payroll cost, effectively making the $100,000 cap apply only to employee salaries and wages.
Here are additional issues for PPP borrowers to consider in deciding whether to accelerate the funding of retirement plan costs for the covered period:
Elective deferrals employees make from their own compensation should be included as a payroll cost since these deferrals would be made from, and considered a part of, employee compensation.
Employer Matching Contributions
Payroll costs under the program also include employer matching contributions on employee deferrals to certain defined contribution plans. Many employers wait until the end of the year to pay their 401(k) matching contributions for the entire year. It is currently unclear whether any portion of matching contributions made at year-end can be included as payroll costs under the PPP. Therefore, employers may want to consider front-loading matching contributions for at least the 8-week covered period by paying those matching contributions to the plan during the covered period.
The portion of the matching contributions allocable to and paid during the covered period seem to be included as a forgivable payroll cost. It is also possible the matching contributions allocable to the portion of 2020 before the covered period but paid during the covered period may be treated as such payroll costs.
However, prepaying matching contributions for the portion of 2020 after the end of the covered period would seem to likely not be an allowable payroll cost. Additional guidance from the Treasury Department concerning the inclusion of matching contributions allocable to periods prior to the covered period as payroll costs would be helpful in clarifying this issue.
Employers that decide to make discretionary profit-sharing contributions normally wait until year-end to make those contributions. Waiting until the end of 2020 to make these profit-sharing contributions would likely prevent them from being included as payroll costs under the Paycheck Protection Program.
We believe, however, that any profit-sharing contributions made for and paid during the 8-week covered period may qualify as forgivable payroll costs under the program.
The analysis for profit-sharing contributions for periods before and after the covered period would appear to be the same as the analysis of those issues for employer matching contributions, as discussed above.
Businesses participating in the Paycheck Protection Program should consider being proactive and making matching and/or profit-sharing contributions during the 8-week covered period for its employees. Despite some of the uncertainty discussed above, there are clear benefits:
- By funding retirement plan contributions during the covered period employers will increase eligible payroll costs used to determine the forgiveness of their PPP loan.
- These contributions will go towards meeting the employer’s obligations under the plan.
- The contributions will provide additional retirement plan benefits employees can now access through early, penalty-free 401(k) distributions and plan loans under the more relaxed temporary rules for COVID-19 related hardships. (See Employee Benefits Considerations for Employers During the COVID-19 Pandemic.)
- Finally, an increase in eligible payroll costs may also increase the amount of the borrower’s mortgage interest, rent, and utilities paid during the covered period that may be forgiven, since these amounts are limited to 25% of total forgivable costs.
Please contact any of the authoring attorneys or a member of the Woods Rogers Tax practice to discuss how and when to fund your defined contribution retirement plan contributions.