Small Business Paycheck Protection Program and 401(k)s

Understanding rules surrounding Paycheck Protection Program funds with respect to employer contributions can help ensure they qualify for loan forgiveness.

The Paycheck Protection Program (“PPP”) is a $660 billion aid program of the CARES (Coronavirus Aid, Relief, and Economic Security) Act to provide loans to companies with 500 or fewer employees. The loans may potentially be forgiven as long as the business utilizes the funds in accordance with PPP provisions.

Eligible Costs that Qualify for PPP Loan Forgiveness

Your business will need to repay PPP funds if the loan is used for anything other than payroll costs, mortgage interest, rent, and utilities payment. You may also owe money if you do not maintain certain staffing and payroll levels as follows:

  • Staffing: Loan forgiveness will decrease as the full-time employee headcount decreases
  • Payroll: Loan forgiveness will decrease if salaries and wages are decreased by 25% for any employee who made less than $100,000 in 2019

If you did make staffing or payroll decreases between February 15, 2020 and April 2, 2020, you have until December 31, 2020 to restore full-time employees and/or salaries. (NOTE: the original time frame was updated as part of the Flexibility Act.)

Payroll Costs include Retirement Plan Contributions

PPP funds can be used for payroll costs, including benefits such as health and retirement, until the earlier of 24 weeks from loan origination OR December 31, 2020. (NOTE: the original time frame was updated as part of the Flexibility Act.)

Payroll costs may include 401(k) employer contributions such as match and profit sharing. In addition, in its Interim FAQ Guidance, the Treasury Department clarified that these employer contributions are not counted towards the $100,000 employee compensation cap within the CARES Act definition of payroll costs.

Considerations regarding 401(k) Contributions made with PPP Funds

Although 401(k) plan contributions qualify as PPP payroll costs, employers should be aware that the timing of contribution allocations is important.

  • Employee Elective Contributions made through paycheck deductions are eligible PPP payroll costs since they are compensation.
  • Employer Matching Contributions are eligible PPP payroll costs. In addition, it’s possible (but not yet confirmed) that matching contributions that should have been allocated before the covered period but not paid out until during the covered period may be considered as (forgivable) payroll costs.
    • However, it remains unclear as to whether matching contributions made after the covered period (including matching contributions typically made at the end of the plan year) will qualify under PPP. Employers may, therefore, want to consider ‘front-loading’ matching contributions by paying them out during the covered period to ensure that they are included as payroll costs and forgivable. (NOTE: The Flexibility Act extended the covered period from the earlier of 24 weeks from loan origination OR December 31, 2020.)
    • We are waiting on additional guidance from the Treasury Department regarding employer contribution allocations.
  • Employer Profit Sharing Contributions are often allocated at the end of the year. However, as noted with employer matching contributions, waiting until the end of the plan year to allocate may result in the contribution not being included as PPP payroll costs.

In summary, any businesses receiving a PPP loan should be proactive in making employer contributions during the covered period. While uncertainties remain, the benefits of making employer contributions are clear:

  • Increase in eligible (forgivable) payroll costs
  • Meeting employer contribution obligations of the plan (per plan document)
  • Providing additional retirement benefits to employees

Are 401(k) Employer Contributions Made with PPP Funds Tax Deductible?

IRS Notice 2020-32 states that PPP funds used for eligible expenses that would otherwise be deductible are not tax deductible if the payment of the expense results in loan forgiveness. In other words, if the company uses the funds to provide 401(k) employer contributions as an eligible expense and the loan is forgiven, those employer contributions would not be considered a deductible expense for the business because doing so would count as ‘double dipping’ on tax deductions.

However, on May 5, 2020, the Senate introduced legislation (the Small Business Expenses Protection Act of 2020, S. 3612) that would overrule this notice to clarify that the expenses funded by the PPP are deductible.

Betterment is keeping a very close eye on this and all legislation related to COVID-19 to provide our clients with the latest information.

Betterment is not a tax advisor, nor should any information in this article be considered tax advice. Please consult a tax professional.