ESOP Companies: Retirement Contributions are QUALIFIYING expenses under the Payment Protection Program Loan
By Patrice Radogna, ASA, CPA, ABAR, Director, Advisory Services
Most small businesses are still digesting the $2.2 trillion CARES Act (H.R. 748), which passed on March 27, 2020 as the largest financial support package in U.S. history. Included in the CARES Act are various loans backed by the Small Business Administration (SBA) to help maintain cash flow and retain workers. The CARES Act includes financing options for small privately held companies, including the Payment Protection Program (PPP).1
SBA and the Payment Protection Program Loans
To incentivize employers to maintain payroll during the crisis, the SBA is providing 100 percent federally-backed loans for certain payroll expenses (for companies with 500 employees or less) through June 30, 20202 with up to eight weeks of forgiveness for small businesses, certain nonprofits and self-employed individuals.
Small businesses impacted by coronavirus-related issues between February 15 and June 30, 2020 may apply for loans, which will remain available through the end of June.
Under the PPA program, eligible expenses for calculating PPP loan amounts include3:
- Compensation (salary, wages, commission, or similar compensation, cash tips, etc.)4
- Payment for vacation, family, medical, and sick leave
- Allowance for employee dismissal or separation
- Payment for group health-care benefits, including insurance premiums
- Payment of employee retirement benefits5,6
- Payment of state and local taxes imposed on the compensation of employees
Once an eligible small business or contractor receives the loan, they may use it for the following7:
- Payroll support (including paid sick or medical leave)
- Employee’s salaries, commissions, or similar compensation
- Mortgage, rent and utility payments
- Employee benefits consisting of group health care coverage, including insurance premiums, and retirement
The PPP covers businesses with 500 or fewer employees, unless the covered industry’s SBA size standard allows more than 500 employees, which were operational on Feb. 15, 2020. The size standards are tested on an affiliate basis—combined with all businesses under common control (50% ownership or contractual control)—counting on an aggregate basis towards the size test. Additionally, each entity is limited to one loan, determined by the applicable taxpayer identification number (TIN).
The loans are forgivable if employers retain employees at comparable salary levels prior to the crisis. Borrowers under the PPP may be eligible for loan forgiveness in an amount equal to the amount spent by the borrower (subject to reductions due to reduction in payroll or employee base) during the eight-week period following the origination date of the loan on the following expenses9:
- Loans are used exclusively for their intended purposes (see bullet points directly above)
- Loans are used to offset no more than eight weeks (the maximum amount of time payroll expenses would be fully offset) of eligible payroll expenses
- Businesses retain employees at salary levels comparable to before the crisis
According to the PPP Fact Sheet issued by the U.S. Treasury, it is anticipated that not more than 25 percent of the forgiven amount may be for non-payroll costs.10
Interplay with the Economic Injury Disaster Loan11
Congress’s second emergency bill, the Coronavirus Preparedness and Response Supplemental Appropriations Act signed into law on March 6, 2020 included the SBA’s disaster assistance loans. Under the law, the SBA expanded the ways in which businesses could obtain an Economic Injury Disaster Loan (EID) loan.
Importantly, under the CARES Act, a borrower that receives a PPP loan for employee salaries, payroll support, mortgage payments and/or other debt obligations would not be able to receive an EID loan for the same purpose, or co-mingle funds from another loan for the same purpose. However, an EID loan may be refinanced into a PPP loan. According to Treasury Guidance, issued on April 2, 2020:
- If your EID loan was not used for payroll costs, it does not affect your eligibility for PPP loan
- If your EIDL loan was used for payroll costs, your PPP loan MUST be used to refinance your EIDL
- Proceeds from any advance up to $10k on EIDL will be deducted from loan forgiveness amount on PPP loan
Further, businesses that took out an EID loan between February 15 and June 30 may refinance their original loan into a PPP loan and add any outstanding loan payments to their payroll expenses.
Coronavirus Resource Center
Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.
1. The information provided herein does not, and is not intended to, constitute legal, tax or banking advice; instead, all information and content, is for general informational purposes only. You should consult with your banker, legal or financial advisor to determine how to best access funding available through any government lending program.
2. Through June 30, 2020 or until funds run out.
3. Understanding the Paycheck Protection Program in the CARES Act, Tax Foundation, April 2, 2020.
4. Compensation to employees of $100,000 or greater are excluded as eligible expenses.
5. Sufficient guidance has not been provided by the SBA on whether or not retirement benefits are excluded for employees in the $100,000 or greater category (see footnote 4). Please inquire with the SBA or your banker/CPA on this matter.
6. The Interim Final Rule for the PPP, issued by the SBA on April 2, 2020, states that “payroll costs”, consist of…payment for employee benefits, including insurance premiums and “retirement”. Thus, while the guidance is not as granular as to say ESOP contributions, it is understand that ESOP contributions are a retirement benefit. Thus, the inclusion of this and all eligible expenses, should be thoroughly discussed with your banker or financial advisor.
7. CARES Act To the Rescue…Phase 3 Coronavirus Bill Cares About Small And Midsize Businesses, Franchisors, and Franchisees, Forbes, March 30, 2020.
9. Understanding the Paycheck Protection Program in the CARES Act, Tax Foundation, April 2, 2020.
11. CARES Act To the Rescue…Phase 3 Coronavirus Bill Cares About Small And Midsize Businesses, Franchisors, and Franchisees, Forbes, March 30, 2020.