Jul 27, 2020

PPP Loans and Retirement Plans: Where We Stand

Kenneth Marblestone, JDBy Kenneth Marblestone, JD

On May 19, 2020, I spoke at PICPA’s Employee Benefits Conference on IRS compliance updates and the SECURE Act. Although the attendees, the other presenters, and I were all remote, we had a great conference “together.” In this blog I provide an update on a couple of matters that I discussed during the conference.

PPP Use on Retirement Benefits

Of all the questions about the federal CARES Act that my clients have asked since its passage on March 27, the most prevalent has been what constitutes “the payment of any retirement benefit” that would qualify as “payroll costs” which, if paid with the proceeds of a Paycheck Protection Program (PPP) loan, would be eligible to be forgiven? The most conservative position would be to pay all regularly scheduled 2020 matching and/or safe harbor contributions attributable to compensation paid during the eight week period. Because the Small Business Administration (SBA) indicated in its loan forgiveness application that these expenses could be “paid or incurred,” as opposed to “paid and incurred,” a reasonable argument can be made that all 2019 retirement plan contributions that would normally be paid by the due date of the plan sponsor’s 2019 tax return could be paid during the eight week period and qualify for loan forgiveness.

Unfortunately, the SBA has not yet clarified which retirement plan contributions can be paid and forgiven. The good news is that for a large percentage of plan sponsors the issue may now be moot. Under the Paycheck Protection Program Flexibility Act (PPPFA), signed into law June 5, the period of time for spending PPA loan proceeds was extended from eight to 24 weeks. Plan sponsors who did not have sufficient direct payroll expense (e.g., W-2 compensation) in the eight week period to use at least 75% of the loan for that purpose now have more time to use the proceeds on such expenses. The 75% threshold has also been reduced to 60%, so more of the loan can properly be used for nonpayroll expenses such as mortgages, rent, and utilities. The SBA will have another 16 weeks to explain what retirement plan contributions qualify for forgiveness.

Still to be determined is the tax deductibility of expenses paid with PPP loan proceeds. The IRS ruled (IRS Notice 2020-32) that because the amount of the loan forgiven is not taxable income to the recipient (per the CARES Act), expenses paid with these loan proceeds would not be deductible. Congress did not intend this result when enacting the CARES Act, and we may well see further legislation overturning the IRS position. Until that occurs, there is concern with respect to retirement plan expenses, in that nondeductible contributions are generally subject to a 10% excise tax under IRC Section 4972.

Loans from Retirement Plans

Another area to look at more closely are coronavirus-related distributions (CRDs) and loans (CRLs). CRDs and CRLs represent expanded opportunities for benefit plan participants negatively affected by the pandemic (a “qualified individual”) to obtain money quickly from their retirement plans to meet urgent needs. However, there are still gaps in the law. For instance, a spouse’s layoff or furlough does not make an individual a qualified individual, nor does a direct reduction in income without a concomitant reduction in hours. These omissions may yet be corrected by future legislation or regulation. Nevertheless, our clients have not expressed significant interest in permitting CRDs and CRLs in their plans. (Remember, to do so is optional.)

Qualified individuals also are able to suspend loan payments due between March 27 and the end of the year for a period of one year. With employees now being brought back to work, though, we are being asked to provide forms pursuant to which qualified individuals, who had previously suspended loan payments, can now terminate their suspension elections and resume making payments.

I would be pleased to discuss any issues you would like to raise.

Kenneth Marblestone, JD, is a partner with The MandMarblestone Group LLC Philadelphia. He can be reached at Marblestone@mand.com.

For more content on employee benefit plans, check out the On-Demand courses available from PICPA’s 2020 Employee Benefit Plans Conference. 

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.