Paycheck Protection Program

Retirement contributions are a permissible payroll cost for purposes of Paycheck Protection Program loan forgiveness under the CARES Act.  However, in order to be forgiven, the expense must be "incurred" during the 8-week covered period following the loan origination.  In order to be "incurred," does the contribution actually have to be made to the plan, or is it sufficient that a tentative liability is accruing during the covered period?  (I suspect the former...  i.e., that this is handled on cash, not accrual, basis.)

Has anyone considered how this will affect plans with an "employment on the last day of the plan year" allocation condition, which would normally not be made until early in the next plan year?  Except for those with very unusual plan years, these plans will have no way of knowing who is entitled to contributions by the end of the covered period.  If it will be necessary for PPP employers who have plans with allocation conditions to pre-fund contributions in order for those amounts to be eligible for forgiveness, how are people seeing the mechanics of that handled?  Are these amounts just being stuck in a forfeiture account or some other unallocated account?

On 4/16/2020 at 7:51 AM, BTG said:

Retirement contributions are a permissible payroll cost for purposes of Paycheck Protection Program loan forgiveness under the CARES Act.  However, in order to be forgiven, the expense must be "incurred" during the 8-week covered period following the loan origination.  In order to be "incurred," does the contribution actually have to be made to the plan, or is it sufficient that a tentative liability is accruing during the covered period?  (I suspect the former...  i.e., that this is handled on cash, not accrual, basis.)

Has anyone considered how this will affect plans with an "employment on the last day of the plan year" allocation condition, which would normally not be made until early in the next plan year?  Except for those with very unusual plan years, these plans will have no way of knowing who is entitled to contributions by the end of the covered period.  If it will be necessary for PPP employers who have plans with allocation conditions to pre-fund contributions in order for those amounts to be eligible for forgiveness, how are people seeing the mechanics of that handled?  Are these amounts just being stuck in a forfeiture account or some other unallocated account?

I've considered everything, and committed to nothing! We simply do not know what they are going to allow and how they are going to calculate it. At this point, our opinion is that they are going to count contributions to the plan made in the eight week period, with no limitations. 

So, a one man DB plan with no employees is limited to $100k for comp, but his $220k DB contribution in the 8 weeks will completely meet his obligation to be entitled to the full 100% forgiveness.  Is that fair? Doesn't matter.  What matters is what the law is and how they defined the reimbursement rules.

Will end of year allocation matter?  Nope.  If all they will look at is contributions, then that does not matter.  And, they clearly are NOT going to have to look at actual allocations to certify the forgiveness.

But, I am telling clients to wait (for now) until we have some more guidance; but meanwhile I am deferring putting in our own company contributions (normally made with each payroll date) until our 8 week period starts and suggesting that clients do likewise. 

We have been approved for our PPP amount (before the funds ran out - I guess it does  help to be a corporator of the bank I deal with!) and now just waiting for the paperwork and the disbursement, all expected next week. If the guidance isn't out and the 8 weeks is running out, I'll suggest clients go ahead and make the contribution within the 8 weeks anyway; it can't hurt and probably will be the rule.  But if it isn't, the money was going to be contributed anyway so no harm no foul.

And if the entire plan (all sources) are record kept such that a contribution can't be forwarded to the recordkeeper\trustee without attribution to specific employee? [Not that you need another reason to prefer balance forward profit sharing plans!]

On 4/17/2020 at 1:25 PM, Mike Preston said:

And if the entire plan (all sources) are record kept such that a contribution can't be forwarded to the recordkeeper\trustee without attribution to specific employee? [Not that you need another reason to prefer balance forward profit sharing plans!]

Hmmmm... obviously, not a problem I have to deal with in the vast majority of our clients, but just thinking.....

Do we have an unallocated account in the name of the plan on the platform?  If not, do we set up a checking account in the name of the plan and make the unallocated contribution there within the 8 weeks for ultimate allocation on the platform? 

Does anyone think that wouldn't work? 

18 minutes ago, Larry Starr said:

... do we set up a checking account in the name of the plan and make the unallocated contribution there within the 8 weeks for ultimate allocation on the platform? 

Does anyone think that wouldn't work? 

Not me.

7 hours ago, Larry Starr said:

Do we have an unallocated account in the name of the plan on the platform? 

Here's an idea for those who run into this problem (of wanting to throw money into a platform plan but not being able or wanting to allocate it, and they don't allow an "unallocated" account) - create a dummy participant with a dummy SSN and make profit sharing contributions to that participant.  When desired, forfeit them and allocate as desired.  I doubt I'm the first person to think of it but nevertheless was quite proud of myself for thinking of a way to outwit these rigid platforms.

For employers with participant directed accounts, we are thinking that if there are no allocation requirements, then the employer could go ahead and pre-fund the contribution for the first few months of the year.  For example, a safe harbor match or safe harbor NEC that is typically made at year-end could be funded into each participants account based on compensation thorough end of May (or whatever), then at the end of the year, the employer would just fund the remaining 7 months.

Also, I am not sure why an employer would not be able to set up a bank account in the name of the plan and deposit the contribution funding into it before the 8 weeks is up(?).  This is typically perfectly acceptable.  Once the money goes into the account in the plan's name it is a plan asset and must be used according to the terms of the plan.  So at year-end that money could be used to fund an employer contribution.   

5 hours ago, AKconsult said:

For employers with participant directed accounts, we are thinking that if there are no allocation requirements, then the employer could go ahead and pre-fund the contribution for the first few months of the year.  For example, a safe harbor match or safe harbor NEC that is typically made at year-end could be funded into each participants account based on compensation thorough end of May (or whatever), then at the end of the year, the employer would just fund the remaining 7 months.

Also, I am not sure why an employer would not be able to set up a bank account in the name of the plan and deposit the contribution funding into it before the 8 weeks is up(?).  This is typically perfectly acceptable.  Once the money goes into the account in the plan's name it is a plan asset and must be used according to the terms of the plan.  So at year-end that money could be used to fund an employer contribution.   

Ummm..... isn't that what I said earlier?

Separately, my bank issued the loan documents to me earlier today; I signed them via docu sign and the money was in our account less than 10 minutes later!!!!!  

13 hours ago, Bird said:

Here's an idea for those who run into this problem (of wanting to throw money into a platform plan but not being able or wanting to allocate it, and they don't allow an "unallocated" account) - create a dummy participant with a dummy SSN and make profit sharing contributions to that participant.  When desired, forfeit them and allocate as desired.  I doubt I'm the first person to think of it but nevertheless was quite proud of myself for thinking of a way to outwit these rigid platforms.

We had somewhat of an issue with one daily platform provider.  After a few years, they (and their auditors, I think) did not like the idea of holding plan assets (over $200K) that were not allocated to participants... even if for a few months (participant was a Mr. Prefunded Account).  The client was going to set up an external bank account, but then decided to not pre-fund their plan year contributions, but hold it somewhere else within their corporate finances, and pay a single contribution deposit after the end of the year.

Just to clarify my position, opening a bank account in the name of the plan is fine...except for the (at least potential) hassle factor.  There's the issue of setting it up right, getting info on it, getting money from it when needed, etc.  If possible I'd want to eliminate that potential for screwup.

Thank you everyone for the responses!  I agree that contributing to an unallocated account during the covered period should work, as long as the recordkeeper is willing/able to support that.

To add one more wrinkle on to this situation, what are everyone's thoughts on plans that have only a discretionary profit sharing formula?  Arguably, the plan has no contribution obligation until the contribution level for the year is determined by the board.  However, I still think the employer should be able contribute the portion of the full year's contribution that is attributable to the covered period during the covered period, but they will need to make sure that they ultimately set the contribution level high enough to support that amount.  I don't see any guidance on this, but it would seem to support the legislative intent of the PPP.

Anyone disagree?

4 hours ago, BTG said:

but they will need to make sure that they ultimately set the contribution level high enough to support that amount.

Yes

5 hours ago, BTG said:

Thank you everyone for the responses!  I agree that contributing to an unallocated account during the covered period should work, as long as the recordkeeper is willing/able to support that.

To add one more wrinkle on to this situation, what are everyone's thoughts on plans that have only a discretionary profit sharing formula?  Arguably, the plan has no contribution obligation until the contribution level for the year is determined by the board.  However, I still think the employer should be able contribute the portion of the full year's contribution that is attributable to the covered period during the covered period, but they will need to make sure that they ultimately set the contribution level high enough to support that amount.  I don't see any guidance on this, but it would seem to support the legislative intent of the PPP.

Anyone disagree?

 

I disagree, but not with your stated opinion but with your assumption.  In fact, there appears to be nothing that requires a pro rata calculation as you seem to imply.  It appears that whatever is contributed during the 8 weeks will count without any additional justification as to why those numbers should be ok. Thus, if they know their annual contribution will be, say, $100k, it appears they can contribute the full amount of (or any part of) the $100k at this point and take credit for it.  Now, we don't have official guidance yet on this, so the recommendation right now is to hold off on making this contribution with the expectation that we will get more specific guidance shortly (hoping within the next week or so, but we shall see...).  If no guidance by say, six weeks into the 8 week recovery period, I would go ahead and make the contribution (if they have the cash) of whatever magnitude they can afford without regard to any pro rata calculation. There does not appear to be any downside to that as long as they know they will make the contribution ultimately anyway.

16 hours ago, Larry Starr said:

there appears to be nothing that requires a pro rata calculation as you seem to imply

For loan forgiveness purposes, the PPP requires the amounts to be used for "costs incurred or payments made" within the 8-week covered period.  We obviously need more guidance on exactly what that phrase means.  While I don't think the SBA is interested in splitting hairs on minor timing differences, it seems clear to me that these amounts were intended to somehow relate to the 8-week time period, and a straight cash basis accounting interpretation that would allow employers to accelerate expenses and obtain forgiveness on those amounts seems abusive.  Given the limited guidance we have at this point, I think it would be very aggressive to take the position that an employer could fund the entire year's profit sharing contribution during the 8-week period and obtain loan forgiveness for those amounts.

Of course, I'm assuming that most plan documents allocate discretionary profit sharing contributions according to a formula that is somehow based on the full plan year compensation.  So they couldn't, for instance, declare a contribution of "x% of compensation paid during the 8-week covered period," without eventually setting a profit sharing contribution of at least x% of full plan year compensation.

I do agree that plan sponsors would be wise to hold on to these funds in the hopes that more specific guidance is issued before the end of their 8-week covered period.

2 hours ago, BTG said:

Given the limited guidance we have at this point, I think it would be very aggressive to take the position that an employer could fund the entire year's profit sharing contribution during the 8-week period and obtain loan forgiveness for those amounts.

I agree.  The accountants I am working with are mostly taking that approach (funding "for" the eight week period).

4 hours ago, BTG said:

Given the limited guidance we have at this point, I think it would be very aggressive to take the position that an employer could fund the entire year's profit sharing contribution during the 8-week period and obtain loan forgiveness for those amounts.

 

While I do believe that my interpretation is going to be the rule ("if the money is spent, it counts!") and that is what we are expecting to be the rule, it will be nice to see guidance that DOESN'T conflict (I am guessing it won't actually deal with the issue: it will just count contributions to the plan during the 8 weeks).  But as noted, I am suggesting that clients wait (if they otherwise would not have contributed during that time period) until we have guidance or until 6 weeks into the 8 weeks if we don't have guidance (which pray will NOT be the situation).

In the calculation of the average monthly payroll, we have recommended that all clients add the full annual contribution for 2019 (divided by 12) for the amount of money they are applying for.  Worse case scenario: they will have to give back some of what they got. Best case, they get free money that is not taxable.  No downside that we can see on the input side.

Similar question, but different thought...

Can a plan be amended to provide an additional level of employer contributions based on the compensation earned by eligible employees over the eight week window? For example, can an employer provide a non-elective contribution based solely on compensation from 5/1/2020 through 6/30/2020. I realize that testing will need to be done on annual comp, but I'm trying to think of other reasons why this may not be a valid approach.

3 hours ago, BrownTrout said:

Similar question, but different thought...

Can a plan be amended to provide an additional level of employer contributions based on the compensation earned by eligible employees over the eight week window? For example, can an employer provide a non-elective contribution based solely on compensation from 5/1/2020 through 6/30/2020. I realize that testing will need to be done on annual comp, but I'm trying to think of other reasons why this may not be a valid approach.

Well, while I don't like that idea, it is easily accomplished for NHCEs.  Just do -11g amendments after the year end to allocate specific additional dollar amounts to those individuals you desire to benefit.  EASY route.