starting a new plan with PPP money?

A CPA asked me about this yesterday.  His client has money left over, and has no existing retirement plan.  So rather than return it, he'd like to open a profit sharing plan for his employees and pre-fund it with the PPP money (understanding that at the moment it may not be deductible).  Seems like it would be allowable, if maybe not quite in the spirit of the program...

I can't cite anything but I listened to a couple of lawyers last week for my CPA CPE and this question came up.  They are saying there is nothing stopping it.  I agree maybe not in the spirit of the law but doesn't seem to be prohibited. 

Maybe a few lawyers that come around here will give their insights also. 

10 hours ago, AlbanyConsultant said:

A CPA asked me about this yesterday.  His client has money left over, and has no existing retirement plan.  So rather than return it, he'd like to open a profit sharing plan for his employees and pre-fund it with the PPP money (understanding that at the moment it may not be deductible).  Seems like it would be allowable, if maybe not quite in the spirit of the program...

Under the current rules, it is perfectly ok.  And it is in the spirit of the program which is to spend money on employee compensation, and luckily, retirement benefits and health insurance fall into that category.

I would just remind them that retirement plans must be intended to be permanent (and not a shelter for a one-time windfall), and contributions to a profit sharing plan must be substantial and recurring. As long as they are ok with making some other contributions in some future years it should be fine.

4 hours ago, C. B. Zeller said:

I would just remind them that retirement plans must be intended to be permanent (and not a shelter for a one-time windfall), and contributions to a profit sharing plan must be substantial and recurring. As long as they are ok with making some other contributions in some future years it should be fine.

Yes, but....

Has anyone ever seen this challenged by IRS?  You can terminate a plan even after one year if you have a good reason; and a good reason is that "we aren't making money any more but last year we had extra money given to us by the government so we decided to share it with the employees via a retirement plan; we would have like to continue it but business just doesn't allow".

Yes, "permanency" is ostensibly required; in practice it is easily avoidable if need be.

8 minutes ago, Larry Starr said:

Yes, but....

Has anyone ever seen this challenged by IRS?  You can terminate a plan even after one year if you have a good reason; and a good reason is that "we aren't making money any more but last year we had extra money given to us by the government so we decided to share it with the employees via a retirement plan; we would have like to continue it but business just doesn't allow".

Yes, "permanency" is ostensibly required; in practice it is easily avoidable if need be.

I wouldn't be surprised if they looked for it as a part of a larger PPP abuse initiative rather than a qualified plan issue

20 minutes ago, RatherBeGolfing said:

I wouldn't be surprised if they looked for it as a part of a larger PPP abuse initiative rather than a qualified plan issue

I would be surprised, and I'll take bets!

Obviously, The company should consult with its tax attorney or CPA, but I would not recommend it.  While there is some indication employer matching funds qualify as the "payment of any retirement plan benefit" and, thus, are permissible uses of PPP loans, the cost of starting a retirement plan are designated as "settlor expenses" under ERISA because they are thought to benefit the employer more than participants.  For that reason, I would not recommend it, but the company should check with its counsel.

1 hour ago, Sean Orick said:

Obviously, The company should consult with its tax attorney or CPA, but I would not recommend it.  While there is some indication employer matching funds qualify as the "payment of any retirement plan benefit" and, thus, are permissible uses of PPP loans, the cost of starting a retirement plan are designated as "settlor expenses" under ERISA because they are thought to benefit the employer more than participants.  For that reason, I would not recommend it, but the company should check with its counsel.

The OP said nothing about paying expenses, just FUNDING THE PLAN with PPP money, which was what I answered.  There's no question that matching funds or any other plan contributions qualify for the compensation side of the forgiveness calc.

Yes, that is the proper definition of settlor expenses and I agree with you, but that was not the question in this case.  I would certainly recommend that they could set up the plan if that's how they wanted to spend their PPP money.

Also, since I am an Enrolled Agent with the same legal authority before IRS and Treasury as a CPA, I feel free to provide my advice and beliefs while the client is always free to check with his accountant and/or attorney, who probably knows very little about the issue and often will be calling on me for the answer! "It's good to be the king."?

I probably shouldn't say anything but I keep seeing this or similar questions come up and it really bothers me given everything that is going on.  While I agree the current rules would seem to permit this and also agree the likelihood of significant enforcement is pretty limited, I respectfully think it's a stretch to say that it is clearly within the spirit of the program.  Afterall, the name of the program is Payroll Protection and the rules place a clear emphasis on protecting payroll rather than new and never previously received retirement benefits.  Matching contributions tied to ongoing payroll during the covered period or prorated contributions toward existing plans I can better see but taking significant excess amounts (whose very existences seems to raise questions under the way i understand the program amounts to be calculated) and creating a new plan is, I think, a real stretch.  Just because the rules might be read to permit it doesn't mean employers should do it nor does it mean professionals should advise employers to do this even if the risk of enforcement is low.   I have friends who have lost their jobs and most if not all income during the last couple of months.  I realize one employer not maxing out their PPP spend doesn't do anything to help others directly but in the bigger scheme of things I think it important to take a broader societal view and would not be surprised if regulators do not come at these questions from that perspective as well even if unlikely to really audit.

19 minutes ago, Eric Taylor said:

I probably shouldn't say anything but I keep seeing this or similar questions come up and it really bothers me given everything that is going on.  While I agree the current rules would seem to permit this and also agree the likelihood of significant enforcement is pretty limited, I respectfully think it's a stretch to say that it is clearly within the spirit of the program.  Afterall, the name of the program is Payroll Protection and the rules place a clear emphasis on protecting payroll rather than new and never previously received retirement benefits.  Matching contributions tied to ongoing payroll during the covered period or prorated contributions toward existing plans I can better see but taking significant excess amounts (whose very existences seems to raise questions under the way i understand the program amounts to be calculated) and creating a new plan is, I think, a real stretch.  Just because the rules might be read to permit it doesn't mean employers should do it nor does it mean professionals should advise employers to do this even if the risk of enforcement is low.   I have friends who have lost their jobs and most if not all income during the last couple of months.  I realize one employer not maxing out their PPP spend doesn't do anything to help others directly but in the bigger scheme of things I think it important to take a broader societal view and would not be surprised if regulators do not come at these questions from that perspective as well even if unlikely to really audit.

I disagree for several reasons.  First, no one can say what the "spirit" of the program is, and there is legally NO SUCH THING.  So why are we talking about it?  We need to only look at what the actual rules are. 

Second, Congress CLEARLY included health and retirement benefits in THEIR definition of compensation, so who are we to say those benefits are not intended to be included when they clearly are included. I don't know what you "understand" is the issue about how the program amounts are to be calculated, but that process is quite clear now.  The forgiveness forms make it clear that retirement plan contributions ARE part of the calculation; why should we be doing anything other than including such payments?  Did they provide ANY limits on that number?  No, they did not. They could have, but they didn't.

As advisors in the retirement plan area, it is not our job to be concerned about the "broader societal view" when advising our clients. That has no place in the advice; you can discuss with the client your thoughts, but you have to deal with the rules as they exist, not rules that "might be good for society" but don't exist.  I'm not sure what you are actually saying in your last clause in the last sentence since there are triple negatives in that sentence.  

Thanks, Larry.  I appreciate and understand your positions and do not think it fair to others to hijack this thread to debate here so I'll just say I stand by my prior comments, however unartfully crafted they may be, and continue to believe (hope) that the spirit of the laws and programs passed by Congress matter and can eventually come to bear on the interpretation of those laws when questions arise as continues to happen with these issues.

Two points: under the PPP Flexibility Act of 2020, which was signed into law last Friday, your client has a much longer time to spend the money (24 weeks rather than 8 weeks) and in fact the longer period is the default unless the client acts to elect the shorter one, and the 75% compensation threshold for forgiveness has dropped to 60%, so your client may not in fact have extra unused funds now to worry about. 

Second - I am concerned with your comment on "prefunding" the PPP money. The PPP rules do clearly include benefits as part of the compensation issue, and there's been argument in our offices about whether the expense must both be incurred and paid during the "forgiveness" period. For example, a discretionary matching contribution for 2019 deferrals doesn't create a legal obligation until the company determines whether it will, in fact, make the contribution and how much that will be, while a safe harbor 3% non-elective for 2019 was incurred when the participants were vested in the contribution, though the deadline for payment (for a calendar year plan) is later this year. I've not updated that research, so this guidance may have been issued already; but if not, until we have guidance that clarifies the "both incurred and paid" issue, I'd proceed with caution. Pre-funding in general is frowned upon for tax reasons, but I think could be problematic in the PPP context as well.

4 hours ago, ReallyChill said:

 

Second - I am concerned with your comment on "prefunding" the PPP money. The PPP rules do clearly include benefits as part of the compensation issue, and there's been argument in our offices about whether the expense must both be incurred and paid during the "forgiveness" period. 

It is now absolutely clear that it is PAID OR INCURRED.