3508EZ PPP Forgiveness Application – Reading Between the Lines

On June 16, 2020, the SBA released the new simplified 3508EZ Forgiveness Application. The EZ application is a short three pages as compared to the five-page full application. To qualify for the EZ application the employer must attest:

The Borrower did not reduce annual salaries, or hourly wages, of any employee by more than 25 percent during the Covered Period, when compared to the period between January 1, 2020 and March 31, 2020 (not including employees who earned more than $100,000 during 2019).


The Borrower did not reduce the number of employees or the average paid hours of the employees between January 1, 2020 and the end of the Covered Period. The Borrower can ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.  Also, the Borrower may ignore reductions in an employee’s hours if the Borrower offered to restore employment and the employee refused.

On the surface, the EZ application looks very straight forward. It simply asks for payroll and non-payroll costs. Caution, while this seems easy enough, there are areas the Borrower needs to be aware of.  

Owner Compensation Recap (based on 24-week election):

C Corporation (C Corp) Owners – Compensation is limited to 2.5 months based on 2019 cash compensation; total wages are capped at $20,833.  Also, state and local taxes, employer contributions for health insurance, and employer contributions for retirement plans (capped at 2.5 months of 2019 amounts) are considered allowable costs.

S Corporation (S Corp) Owners – S-Corp owners are treated the same as C-Corp owners; however, employer contributions for owner health insurance are not allowable costs.

Self-Employed Schedule C (Sole Proprietor) or Schedule F (Agricultural Sole Proprietor) filers – Compensation is limited to 2.5 months of the 2019 net profit as reported on IRS Form 1040, Schedule C line 31 or Schedule F line 34. State and local tax payments, employer paid health insurance and retirement contributions are not eligible costs. Also, the business is required to submit the 2019 IRS Form 1040, Schedule C or F, if it was not submitted with the initial application.

Partnerships – Compensation is limited to 2.5 months based on 2019 net earnings from self-employment, which is calculated using the 2019 IRS Form 1065, Schedule K-1 box 14a (reduced by box 12, section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion on oil and gas properties) multiplied by 0.9235. Compensation must be paid during the coverage period. Separate payments for health insurance, retirement, or state and local taxes are not eligible for additional loan forgiveness. 2019 IRS Form 1065 K-1s are required at the time of the forgiveness application if not submitted during the initial application.

LLC Owners – LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020. 

Non-owner Compensation– For all non-owner employees, cash compensation is limited to either $15,385 if the 8-week coverage period is elected, or $46,154 if the 24-week coverage period is elected. There are no limits on state and local taxes, employer paid retirement plan contributions or health insurance contributions that were paid during the covered period.

Full-time Equivalent (FTE) Employee Head Counts– To qualify for the EZ application the Borrower must not have reduced the number of employees or the average paid hours of employees during the covered period as compared to the comparative period. Because of this requirement, the FTE reduction calculation becomes very important.  It is interesting that there is no specific area to include the calculated FTE employee counts on the EZ); however, there is still a requirement to calculate whether FTE employees had been reduced.  Also, the application line requesting number of employees at time of loan application/forgiveness application should be total employees, not FTE employees.

To calculate the reduction in FTE’s you may need to perform multiple calculations for the various comparative periods. The possible comparative periods include January 1, 2020 through February 28, 2020, and February 15, 2019 through June 30, 2019.   Or if you are a seasonal employer, the SBA allows the use of whichever comparative period during 2019 yields the greatest forgiveness for the Borrower. In addition, there are two different methods you can use to calculate your company’s FTE figures. One method is calculating part time employees based on their average hours worked compared to a 40-hour employee. The second method is to calculate each part-time employee equal to a ½ employee. For these reasons, the business could be required to run several FTE calculations to ensure maximum forgiveness.

Borrowers should make sure to read the instructions to either the 3508EZ or full 3508 applications before completing. Also, continue to pay attention to upcoming legislation and KT updates as we learn more regarding the final rules and regulations for the forgiveness application.

For questions or assistance with the forgiveness application, please reach out to Austin Eichacker at [email protected].

September 25, 2020

PPP Forgiveness Update

Automatic and Simplified Forgiveness Process Coming?

Currently, there are bi-partisan proposals in Congress which may allow ‘automatic’ forgiveness for small PPP borrowers ($150,000 or less) by signing a simple good-faith attestation.  There appears to be a high probability this legislation will pass.  In addition, borrowers between $150,000 and $2,000,000 will no longer be required to submit supporting documents with their application.  You would still need to retain the supporting documents for three years should you be audited. There are no proposed changes for borrowers of $2 million or more. Unfortunately, we are unlikely to know the outcome to these proposals until mid to late September because Congress is currently on recess. Congress will likely need to decide before the end of September as the 2021 fiscal budget is due September 30th.  

In addition, probably as a direct result of the unknown outcome of the above congressional proposals, the SBA has not issued their final rules and guidance to the PPP forgiveness application. Most experts agree there is still a need for additional FAQ, rules, and guidance.

When is the Forgiveness Application Due?

The SBA opened the PPP submittal portal on August 10th.  This does not mean you need to rush to get the application completed. Borrowers have up to 10 months following the last day of the covered period (up to 24 weeks after the date you received the PPP funds) to apply for forgiveness. After 10 months the loan is no longer deferred and the borrower must begin paying principal and interest. There is no rush to submit the application.

Potential questions you may have:

I have contracted with KT to perform the PPP forgiveness application and have submitted all the requested documents.   Now what?

First and foremost, thank you for allowing us to assist with this process and getting us the documentation needed to complete and/or accompany the application. At this time, we are concentrating on forgiveness applications of amounts greater than $150,000. We are still accepting and receiving documents for all PPP forgiveness applications. This way, if the proposals by Congress do not pass, we are ready to complete the applications. However, because we don’t wish to waste your money, we are not currently completing applications for loans less than $150,001 unless specifically requested.

We would like KT, or have contracted with KT, to complete the PPP application; however, we received a loan for less than $150k. Should we hold off on sending documents to KT?

While there is potential to receive automatic forgiveness with Congress’s proposal, this has not been finalized. We would prefer you to both reach out and upload the documents requested. This way we would then be ready to complete the application if necessary.

The bank has contacted our business regarding completing the new 3508EZ application. Is there anything special I should know before filling it out?

The new EZ application is a simplified version as compared to the full 3508 forgiveness application. If you are self-employed or have no employees, you will be required to submit this form. However, the complex rules, regulations, and calculations needed to complete the application are still applicable. Examples of calculations still required for the EZ application are:

  • FTE calculations during the coverage period and a comparative period.  You also need to consider potential FTE reduction exceptions for terminated employee positions for which you were unable to rehire a similarly qualified employee. Compensation limits depending on whether the 8 or 24 week period is elected
  • Owner limits and restrictions depending on how your company is legally structured
  • Payroll requirements of at least 60%

If you have any questions or are interested in KT assisting with the PPP forgiveness application please contact Austin Eichacker at [email protected].

August 26, 2020

401(k)/403(b) Audit Requirements/Quality Study Results

The Employee Retirement Income Security Act of 1974 (ERISA) sets requirements for plan sponsors of 401(k) and 403(b) plans to help protect the interests of the participants and beneficiaries of these plans.  Among many items established by ERISA, certain plans are required to have annual audits performed on the plan’s financial statements by an independent certified public accountant. IRS penalties for late filing of a properly prepared 5500 tax return are $25 per day, up to a maximum of $15,000.  In addition, Department of Labor penalties can run up to $1,100 per day, with no maximum. To avoid these penalties, you need to know if your plan requires an audit.

To begin, plan administrators should know the “80-120 participant rule”. Plans are allowed to file Form 5500’s to the IRS as small plans, and do not require an audit, as long as their plan does not exceed 120 eligible participants on the first day of the plan year. While it is unheard of, an administrator could elect to have an audit with as few as 80 participants. Once the plan has exceeded 120 eligible participants at the beginning of a plan year, the plan is considered to be a large plan and must have annual audits completed in succeeding years. If the plan would ever fall below 100 eligible participants at the beginning of a following plan year, the plan could then again file as a small plan and no audit would be required. The terminology of the 80-120 participant rule is extremely important. A business can easily have 120 or more eligible participants but have less than 120 current employees.

So what is an eligible participant? Eligibility includes current employees who are eligible for the plan (including those who are not participating!) as well as former employees who have a balance in their account. Plan eligibility requirements vary plan to plan. Eligibility often depends on age and time of service requirements. However, for some plans, eligibility includes every employee if no prerequisites were elected as part of the adoption agreement. All plan administrators should be knowledgeable of their plan’s definition of eligibility and should constantly monitor the number of “eligible participants” to ensure they do not require annual audits.

For those plans that do require annual audits, audited financial statements are required to be submitted with the Form 5500, Annual Return of Employee Benefit Plans, on the last day of the seventh month after the plan year end. There is an optional extension of 2 ½ months.

As mentioned earlier, ERISA was established to protect the interests of the plan’s participants. This is why the US Government requires the audit—even though it is often viewed as an expense burden. However, a recent study by the Employee Benefits Security Administration, along with the Department of Labor, found that nearly 4 out of 10 audits contained major deficiencies by the CPA firms conducting the audits.  The study also found there is a direct correlation between the number of audits a firm performs annually and the deficiency rate. The report found CPA firms which perform only 1-2 employee benefit plan audits annually had a 76% deficiency rate compared to only a 12% deficiency rate among the firms which specialize in employee benefit plan audits.

As plan administrators of your 401(k) and 403(b) plans, it is your responsibility to protect the financial interests of the plan’s participants. Be sure to select auditors who are qualified and understand the importance of quality audit work. At Ketel Thorstenson, LLP we partake in annual employee benefit plan trainings, are members of the Employee Benefit Quality Center, and have the experience of auditing more than 40 employee benefit plans annually.

If you are interested in knowing more about 401(k) or 403(b) plan audits, or have any questions about Ketel Thorstenson’s employee benefit plan practice, please contact my direct line at 605-716-3259.

December 4, 2019