CARES Act 2020: Paycheck Protection Loans as Funding for Defined Benefit Pension Plans Sponsored by Small Businesses
Apr 16, 2020
UPDATE: On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act into law. The new act provides an additional $310B in funding to the Paycheck Protection Program. While it offers a new opportunity for businesses to apply for a PPP loan to potentially fund Retirement Benefits, it comes with one big stipulation:
Funds will likely exhaust even faster than the original program due to the businesses already in the queue after missing the last round, hoping for additional funding to the PPP. Some pundits have suggested that funds could run out in just two days.
The new act also sets aside $60B for small and medium sized banks to help smaller companies who are in need of assistance. It may be prudent to consider smaller banking or nonbank lenders to access the funds quicker.
The original posting follows below:
UPDATE: As of April 16, 2020, applications to the $349 billion Paycheck Protection Program (PPP) offered by the Small Business Administration (SBA) have exhausted the initial funding. Even though the SBA is no longer accepting new applications for PPP loans, it may be helpful for plan sponsors to remember that:
- Funds already received from the PPP can still be utilized to fund a defined benefit program while maintaining the ability for the loan to be forgivable (even though the original application may not have include DB funding as an intention for the money).
- The Senate is considering adding an additional $250 billion to the PPP. Both sides of the aisle agree that the initial $349 billion was insufficient, so it seems likely that the PPP will reopen once Congress agrees on the specifics.
The original post follows below:
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided an unprecedented level of economic stimulus across the American way of life ranging from individuals, state and local governments, and corporations of all sizes. Part of that law provides loans to small businesses through the Paycheck Protection Program (PPP) from the U.S. Small Business Administration (SBA.) The loan will be 100% forgiven (effectively it becomes a grant) if applied to payroll costs. The law includes specific language including retirement and other employee benefits as payroll costs.
What does this mean for our clients?
An eligible company could decide to contribute any portion of the PPP loan to their Defined Benefit Pension Plan. The contribution to the Plan may be tax deductible and likely 100% forgiven since retirement benefits constitute payroll costs. With the contribution comes the benefits of a better-funded pension plan: lower future contribution requirements, enhanced book expense and funded status, and reduced variable rate PBGC premiums.
If you were not planning on applying for a PPP loan, there may be utility for your organization to apply and use the full proceeds to fund the Defined Benefit Pension Plan.
For example, consider a small business with 300 employees with total annual payroll of $12M (based on an average annual salary of $32k plus $8k in benefits per employee). This company could apply for a total PPP loan of $2.8M calculated as the sum of the following components:
- $2.5M (representing 2.5 months of the $12M total annual salary)
- $50k (representing 2.5 months of the 2% employer contribution into the 401(k) Plan)
- $250k (representing 2.5/12ths of the total 2019 employer contribution into the defined benefit plan of $1.2M)
Assuming the organization can maintain payroll for the existing employees without the loan, it could contribute the full $2.8M loan to the Defined Benefit Pension Plan. Since contributions towards retirement benefits are payroll costs, the $2.8M loan would not need to be repaid. In addition, if the Plan pays variable rate premiums for PBGC coverage, the $2.8M in contribution could reduce PBGC premiums by as much as $126K annually, (i.e. 4.5% of the contribution).
Alternatively, $1M of the loan could apply towards maintaining payroll and $1.8M could be used to fund the Defined Benefit Pension Plan. Once received, as long as at most 25% of the money from the loan is used towards non-payroll expenses such as rent, mortgage payments, or utility payments, the full amount will be forgiven.
Additional Loan Forgiveness Considerations
There are a couple of important conditions that must be satisfied so that the loan is forgiven:
- The organization must have less than 500 employees to be considered a small business
- The components of the loan attributable to individual payroll cannot exceed $100k per participant. The $100k limit does not apply to the pro-rata portion of the loan attributable to retirement benefits.
- The organization must maintain employee headcount and compensation levels maintain during the eight weeks following receipt of the loan.
- The loan cannot exceed $10M.
If you do reduce headcount, the portion of the loan considered forgivable will be reduced at the same fraction. For example, if your active employee headcount decreased by 10%, 10% of the loan would be subject to repayment over two years at 1%. The same interest rate and repayment period applies if less than 75% of the loan is used for payroll purposes.
Note that the overlapping consequences of PPP loans to small businesses and the wider ranging tax relief to all companies provided by the CARES Act are still unclear and more guidance is required. It is likely that the IRS will not allow organizations to “double dip” from the different relief aspects of the CARES Act.
You can apply for a PPP loan from any SBA-certified lender, which you can find through the SBA website here:
We recognize that the current economic climate offers a truly cataclysmic scenario for employers, and for many, a PPP loan provides a single positive step towards an uncertain future. Using a portion of a PPP loan towards your Defined Benefit Pension Plan isn’t an option for everyone but it does provide a unique opportunity to fund a pension plan through what is essentially a grant from the government. We suggest that you consult with your legal or tax advisors if you are considering contribution of a portion of your PPP loan to your Pension Plan. As always, your BPAS representative is here to help as well.
Peter Faber, ASA, EA, MAA is a Senior Consultant with BPAS Actuarial & Pension Services.
Treasury Fact Sheet: https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf