The hugely popular Payroll Protection Program (PPP) provides loans to small businesses that are ultimately forgivable if the funds are used to cover payroll costs and other specified expenses within the eight weeks following receipt of funds, so long as workforce numbers and average salaries are maintained during those eight weeks.
Included in the definition of “payroll cost” is a reference to “payment of any retirement benefit”. Unfortunately, there has not been any guidance on exactly what that means. For example, some practitioners and plan sponsors have suggested that retirement plan contributions made during the eight-week period could be included in the forgivable portion of the loan, while others have suggested only retirement benefits accrued during the period could be forgiven.
On April 30, the IRS provided some guidance in the form of Notice 2020-32, which states that forgiven loans will not be tax deductible. In other words, except in rare circumstances, loan proceeds should likely not be used to cover retirement plan contributions if the plan sponsor intends the loan to be forgiven, since any such contributions would be non-deductible.
While we are waiting for more clarity regarding the treatment of retirement plan contributions, plan sponsors should proceed with caution using PPP funds for retirement plan contributions.
As always, consult with your tax advisor and your IAI consultant if you’d like to explore this issue in more detail.