The PPP Guide to Retirement Plans | Paycheck Protection Program

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The government is offering over $2 trillion in stimulus under several different programs. The most significant of which is the Paycheck Protection Program (also known as “PPP”). But how are retirement plans treated under the PPP? We’ll take a look.

Table of Contents

What is the Paycheck Protection Program?

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (also called “CARES”) Act of 2020. The Act created the Paycheck Protection Program to provide assistance to small business owners impacted by the COVID-19 crisis.

The plan allows for loans to be issued that will cover payroll costs as well as rent and other specified operating costs. These loans will then be forgiven once the business meets the forgiveness criteria. The goal is to give companies additional funds so they can weather the economic storm and keep employees on payroll.

Calculating the Paycheck Protection Program Loan is in theory a simple process. It is completed by multiplying your “Average Monthly Payroll” by a factor of 2.5. You can then add the EIDL amount (if you applied for EIDL).

Here are a few key ways it is calculated:

  • Most business owners will use 2019 payroll numbers to calculate the “Average Monthly Payroll”.
  • If your business is seasonal in nature, the company can elect to use average monthly payroll for the period of time between February 15, 2019 and June 30, 2019.
  • If you started a new business, the average monthly payroll can be completed using the time frame from January 1, 2020 to February 29, 2020.

It is important to note that no matter which of the above calculations you perform, you would need to exclude costs over $100,000 on an annualized basis for each employee.

Payroll Protection Program

If a business owner is refinancing an Economic Injury Disaster Loan (EIDL), you will need to add the outstanding balance of an EIDL that was made between January 31, 2020 and April 3, 2020. You then deduct the amount of any “advance” under an EIDL.

Simple, right? It gets more painful.

Eligible payroll costs under PPP include:

The first step for business owners looking to get a PPP loan is to calculate payroll costs. Most people would assume this just means aggregating the payroll paid to employees over a specified period of time. Sounds pretty simple.

However, the Act allows payroll costs to be adjusted for several items. Among other things, section 1102 of the Act includes in the definition of payroll costs to include “payment of any retirement benefit.”

So now we can get into a discussion of what constitutes payroll costs under PPP. Payroll costs are broadly defined to include the following:

  • salaries and wages paid to employees
  • commission and tips
  • vacation and sick pay.
  • state and local payroll taxes (including state unemployment)
  • payments for group healthcare benefits, which would cover insurance premiums.
  • retirement benefits.

The last item on the list is what draws the most discussion. That’s why we will dive into it in more detail.

The inclusion of the retirement benefit language specifically in the PPP has generated many questions by CPAs and legal professionals. But more importantly, business owners who need the PPP to pay their bills need clear answers so they can obtain funding.  

Non-eligible payroll costs under PPP include:

The non-eligible payroll costs are typically not that subjective. But you need to consider them when performing the calculation so that you don’t get tripped up.

  • Employee wages in excess of $100,000.
  • Employee payroll taxes and income taxes withheld on wages (these are actually already included in the gross payroll amount).
  • Employer paid portion of federal payroll taxes (employer FICA tax).
  • Payments to employees who principally live outside the U.S.
  • Certain sick and family leave payments for which there a credit is available under sections 7001 and 7003 of the Families First Coronavirus Response Act.

Are retirement plan contributions allowed under the Paycheck Protection Program?

Yes…but be careful. The phrase “payment of any retirement benefit” is very broad and could even be considered vague. But sounds like it is intended to be directed towards employer contributions made as part of normal and ongoing payroll costs. 

The key word to me in the retirement plan language is the word “any.” So this would generally be interpreted to mean all employer retirement contributions. But for many of us this doesn’t sound right. So let’s dig a little deeper.

self employed

But lets be clear. No formal guidance has been issued by Treasury Department or the IRS on this specific aspect of the CARES Act. But the SBA did issue some guidance (more about this later). Make sure you keep on top of any pending guidance as it seems new information is being updated almost daily.

How are retirement plan contributions included in the Paycheck Protection Program loan calculation?

As you read the program guidelines, it states that specific pension benefits that are paid to retired employees should be included in the plan definition of payroll costs. But that doesn’t apply to most small businesses. That’s because most small business owners don’t pay retired employees.

That would be applicable to large companies who may have large accumulated benefits under a defined benefit plan. But it doesn’t make much sense for mom and pop businesses.

colored leaves

Fortunately, the SBA clarified this issue on April 7, 2020 and expressly stated that employer contributions to these plans is not included as a component of the $100,000 maximum. If you want to take a look specifically at what they said take a look here at question #7. But for ease I will post what they said below:

Many business owners did actually assume that the plan included employer retirement contributions to a variety of retirement structures.

Employer contributions under defined contribution plans would include:

  • safe harbor contributions under 401k plans
  • SEP contributions
  • Profit sharing contributions under 401k plan

For example, if a company makes matching contributions during the months of April and May 2020, then those funds would be included in the forgiveness calculation for the 8-week period.

chart with finance, tax and debt

But profit sharing contributions are often made differently. Typically, these would be made at the end of 2020 and may be made up to and including the date the tax return is filed. How this is reconciled is not that clear.

Are the profit sharing contributions included in payroll costs based on a pro rata amount incurred during the 8-week period? Remember that the period ends on June 30, 2020.

In addition, it is unclear how any matching contributions that are made at the end of the year would be included in the payroll cost definition. We know that defined benefit plan contributions are OK, but how are they allocated?

An important point to note is that 401k employee deferrals are not truly a company retirement contribution. It is a salary deferral made at the election of the employee. So as long as you consider gross employee compensation you will not take into consideration the deferrals. This point is often confused.

What about defined benefit plans and cash balance plans?

So as noted above, employer contributions that are made to defined benefit plans (including of course cash balance plans) are allowed.

I get it. The law clearly wants employers to continue to make employer retirement contribution to employees. But I do not think the intent was to allow solo business owners to be able to include generous retirement contributions within the definition of payroll costs under the law.

Financial planning puzzle piece

But I certainly think it makes sense under the spirit of the law to allow contributions for other non-owner employees. Retirement contributions are significant employee benefits and I would think they should be allowed under the law. Just make sure that you discuss the issue with the banker who is assisting and approving your loan.

How are retirement plan contributions included in the Paycheck Protection Program forgiveness calculation?

The period covered under the program during which payroll costs (as defined) can be forgiven goes from February 15, 2020 through June 30, 2020. However, companies will have an 8-week period based on the date the loan was approved. The loans are then forgiven after the 8-week period is up.

As it relates to matching contributions made at the beginning of the covered period, it appears that the company is restricted to the 8-week period covered by the loan forgiveness.

What is the PPP forgiveness calculation?

The forgiveness calculation is different than the loan calculation. Follow these steps:

  • For the first 8 weeks after being approved under the program, you must track your payments made for payroll, rent (or business mortgage interest) and utilities. Be ready to prove this to the lender.
  • You are able to apply to the lender for loan forgiveness 8 weeks after receiving the initial loan approval.
  • Your lender has 60 days to verify your documentation and process the loan forgiveness.
  • If the business maintained it’s employee headcount as of February 15, 2020, it will be eligible for full forgiveness. If it’s headcount is lower then forgiveness will be reduced.
  • Also realize that a maximum of 25% of the loan amount can be used towards non-payroll items like rent and utilities.

Paycheck Protection Program retirement plan examples

So let’s take a look at how the calculation would actually work.

Let’s assume there is a business owner who pays himself $70,000 a year and also has two additional employee that he pays a combined $80,000 a year. In addition, the owner and employees contribute $10,000 into 401k deferrals and the business owners make bi-weekly safe harbor 401k contributions totaling $5,000. The annual payroll costs under PPP would look like the following:

Owner Wage$70,000
Employee wages$80,000
Safe Harbor contributions$5,000
TOTAL Annual Payroll Costs$160,000

Notice how the 401k deferral is excluded from the table. This is because it is already counted in the gross payroll number. But the safe harbor contributions would be included because they are part of an employer sponsored plan.

TOTAL Annual Payroll Costs$160,000
Monthly payroll (divide by 12)$13,333
Loan amount (factor of 2.5)$33,333

So you can see that the loan amount would be $33,333. This amount can go a long way to retaining your employees.

Bottom Line

Understanding how retirement plan contributions are handled under the Paycheck Protection Program can be complex. Additional clarification and guidance is necessary to make sure that the payroll calculation is done correctly.

Small businesses (those with 500 or less employees) were allowed to start applying for the program through the SBA beginning on April 3, 2020. In addition, independent contractors and sole proprietors are able to apply starting on April 10, 2020.

I will attempt to update this post as more information comes to light. But in the meantime, if you have any questions or updates please note them in the comments section. It will help us all understand the program and how we can benefit most from it.

Paul Sundin

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15 thoughts on “The PPP Guide to Retirement Plans | Paycheck Protection Program”

  1. Hi, we were one of the lucky small firms that received a PPP loan in the first wave. My question is: Our 401K plan has a safe harbor match. The firm’s contributions are paid by April 15th or whenever our taxes are due, this year it would be July 15th, unless I wanted to pay it within the 8 weeks of the PPP loan period. Our safe harbor contribution for 2019 will be $22,275.69. We are an LLC and the owner/partner’s match is $11,200 out of the total. Based on what I read on your site, we can deduct the safe harbor match. How much or the remaining $11,05.69 can we use in the forgiveness calculation. Thank you. Merrie Bernstein.
    Email is
    I look forward to your response.

    • Hi Merrie – yes company retirement contributions (like safe harbor contributions) fall under the definition of payroll costs. Since you and your husband work for the business you should be able to include a portion of the entire $22k in the forgiveness calculation. I have seen some lenders say you can include it all. But what would make sense to me is to pro-rate it (8 of 52 weeks) because the total contribution relates to an annual period of time. But in either case, I would make the entire payment in the 8 week forgiveness period. This assumes you have the money and are going to make the contribution anyway. Certainly make sure to discuss with the lender and your accountant. I hope this helps.

  2. Hi Paul –
    Thanks so much for a detailed article. I have an S Corp, and I have a question regarding employer contributions to a SEP IRA. I am confused because the retirement contributions aren’t capped on an annualized 100k salary, however – the wages are. So, for $100k/year employee, monthly wages paid with PPP funds would max at $8,333. Are the SEP contributions then limited to 25% of that number per month ($2083)? If so, this means that they are essentially subject to the $100k cap. Can we pay more of a SEP contribution as it is based on the annual salary, or must it be limited per payroll run to 25% of wages each time? Also – if I didn’t make any SEP contributions for Q1 of 2020, can those be made DURING this 8 week period with PPP funds since they are essentially an existing obligation of the company?
    Thanks for any guidance and insight!

    • Hi Luke – I don’t think the guidance is very clear. But I would recommend that you at least make a SEP contribution equivalent to 25% of your payroll during the 8 week period. So in your situation I would do $4,166 and make sure the check is cut during the 8 week period. If you contribute in excess of this number then that should be fine, but I would expect that only the 25% cap would be included in the forgiveness calculation.

  3. Hi Paul –
    I have one more question regarding salary cap of 100k for PPP. If an employee makes an annual salary of 200k, but the PPP funds can be used for a cap of 100k/yr, am I correct in understanding that I would still run payroll based on 200k, but only use PPP funds for the 100k portion? And since benefits aren’t subject to the 100k cap, the SEP IRA contribution would be based on the full salary during the 8 week period?

    • You can run a payroll in excess of the $200k run rate, but only the $100k run rate will apply to PPP forgiveness. Since you have the $100k cap on wages then I think you would just use 25% of the $100k. Make sure you discuss with your CPA.

  4. Mr. Paul,

    I reviewed an SBA webinar last month, and the SBA representative said that if our business (an S Corporation) had not yet paid its employers’ match yet for our 401K participants for 2019, and since we have extended our 2019 Corporate Tax Return until September 2020, the SBA representative said that the 2019 Employer Matching Contributions would be included in the PPP forgiveness amount towards payroll, if those payments are made within our eight week window. Is this correct? Thank you.

    • Hi Laurie – You probably have a safe harbor 401k plan. The PPP allows for retirement contributions like a 401k match. I would generally agree and you should make sure that the match is paid in the 8 week period. So even though you will pay it during the 8 week period I am not sure if they will give you full credit or just credit for the 8 week period (the match is for an entire year). Nevertheless, I would make sure the payment is made in the 8 week period.

  5. You should be aware that the loan amount available works out to 10.83 weeks
    but you only have 8 weeks to use funds. 160,000/52×8 is 24,615.38. You would have to payback the excess with interest.
    The loan calculation is different than the loan forgiveness calculation.

    • Robert – I absolutely agree with you. The PPP calculation is 2.5 months while the forgiveness period is basically 2 months. I will check to see if there was a typo.

  6. Thank you for the great write up.

    Have there been any clarifications on defined retirement like profit sharing plans? For example, can the remaining dollars after payroll expenses be applied towards a profit sharing plan, or will there be any restrictions on this such as comparing to the years before contributions and/or pro-rating to an 8 week period?

  7. Hi Paul,
    We are an S Corp and we contribute annually profit sharing to our employees. We filed 2019 taxes and made our 2019 contribution in Feb. My question is 2020 contribution… Would we be able to transfer an amount to our 401K Profit Sharing separate checking account during the 8 weeks with the intention to fund our 2020 profit sharing and it be considered for the loan forgiveness? Or do we actually have to fund it to the institution during the 8 weeks?

    • Hi Marlene – the PPP rules were amended a couple days ago and it extended the deadline from 8 weeks to 24 weeks. This being the case, I would write the check out of the business bank account to the investment or custodian account during this period. If you make the annual contribution then you will only be allowed forgiveness for the corresponding PPP period and NOT for the entire year. It sounds like you have a custodian account for your 401k and a separate investment account. As long as the custodian account is legally part of the retirement trust account and NOT just a business bank account, you should be fine getting the money in there as a contribution and investing the money later. Your plan administrator should be able to help with this.

  8. Hello,
    Can an employer make an entire ANNUAL contribution for the year using PPP funds? Or, should it be based only on the strict PPP period of X weeks?

    • Hi Michael – I think you can write the check for the annual contribution during the forgiveness period. But you are only allowed to include in the forgiveness calculation the amount that relates to the forgiveness period. Please note that the PPP rules were revised a couple days ago. The new law extends the deadline from 8 weeks to 24 weeks and lowers the amount of funding for payroll costs to 60%. Based on this, I assume it will be a lot easier for people to get forgiveness on the entire amount.


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