3 years 12 months ago
The issue not addressed in the response above: Can retirement plan contributions attributable to the 2019 plan year made during the 8-week period in 2020 qualify for forgiveness?
The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to the Paycheck Protection Program (PPP) loan. The advisor asked:
“My client received a PPP loan for his small business to help cover payroll expenses. He maintains a safe harbor 401(k) plan, and is wondering whether the business can use some of the PPP loan to make the contribution and deduct the full amount of the 401(k) employer safe harbor contribution?”
Highlights of the Discussion
This question can only be fully answered by your client’s tax professional and/or CPA. The following response provides some general information on the topic based on the guidance issued to date. It’s for informational purposes only and cannot be relied upon as tax advice.
As to the first question, opinions vary among tax professionals, CPAs and TPAs regarding what retirement plan contributions can qualify as a forgivable expense related to a PPP loan. We will need more official guidance for a clear understanding.
As to the issue of deductibility, as it stands now, the IRS appears to take the position (in Notice 2020-32) that if a business uses the PPP loan for eligible expenses that would otherwise be deductible, the business cannot also take the tax deduction. That would be double dipping because the PPP loan, once forgiven, is not taxable income to the business. Consequently, that would mean if a business is allowed to use PPP funds to make employer contributions to a retirement plan as an eligible expense, and the PPP loan is forgiven, the business could not also deduct the employer contributions under Code Section 404. Please see page 6-7 of Notice 2020-32 for a formal discussion.
There are some policy makers in Congress (e.g., Senate Finance Committee Chair Chuck Grassley, R-IA and House Ways & Means Committee Chair Richard E. Neal, D-MA) who are seeking to make changes to the IRS’ apparent stance on this tax issue. Therefore, it is important to watch for additional updates on this ever-evolving question of deductibility, and seek competent tax advice.
Conclusion
The various forms of COVID-19 relief granted to businesses and individuals come with myriad questions. Patience will be needed as answers trickle in, as well as the services of tax experts.
PLEASE NOTE: As always, the opinions expressed here are those of the Retirement Learning Center alone.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
