Help Is on the Way – Understanding the CARES Act
The Coronavirus pandemic is affecting us all. We’ve been staying healthy personally, but our kids have been home from school for weeks, and clients are sharing news of work furloughs, cancelled projects and closed businesses. It’s amazing how fast things are changing in the economy right now.
Many of us can handle volatility in our long-term investment accounts but find a reduction in income to be stressful and even a little overwhelming.
As financial planners, we can help our clients with a game plan for the next few months. An important part of the that plan could be the CARES Act, which is estimated to impact a whopping 90% of U.S. households – it’s big!
We are sharing our take on this information to help our readers. Information below is from sources we consider reliable, but errors are possible. Additional research may be needed to determine how it applies to your situation.
The CARES Act of 2020
On March 27th 2020 the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 was enacted. This estimated $2 trillion package includes nearly half a trillion dollars in individual rebate checks and nearly $400 billion in support including tax credits for wages and payroll tax relief. Many of our clients will directly benefit from these provisions.
The legislation also includes $500 billion for support of several severely-damaged industries, over $300 billion of support for state and local governments, and almost $150 billion for initiatives to support hospitals and the health care system. I’m focused on the pieces that affect individuals, however.
So, what’s in it for you? Here are the provisions most likely to impact our clients:
Recovery rebate payments
Expansion of unemployment benefits
Retirement account distributions and loans
Relief for small business owners
Required Minimum Distributions (RMD)
Other miscellaneous benefits
Keep reading for more details … there is a lot to know!
Recovery Rebate Payments
The “recovery rebate” is a refundable income tax credit against 2020 income of up to $2,400 for married couples filing a joint return or up to $1,200 for individuals. The credit amount is then increased by up to $500 for each child a taxpayer has under the age of 17.
The rebate phases out at higher incomes, so many of our clients might receive a reduced payment or none at all. The exact phaseout amount depends on your filing status and number of children, so check the details if you are anywhere near the threshold.
The applicable AGI* threshold amounts are as follows:
Married Joint: $150,000
Head of Household: $112,500
All Other Filers: $75,000
*Adjusted Gross Income includes dividends, alimony, retirement distributions, business income and capital gains. You can find it on line 7 of the 2018 1040 tax return.
The initial amount paid will be based on either your 2018 or 2019 income tax return (the latest return that the IRS has on file). The payments will be made to the account into which a taxpayer’s 2018/2019 refund was deposited or sent to the last known address on file. The timing is “ASAP” but I have heard speculations that taxpayers will receive payments in late April or early May.
You won’t receive the payment if your income was too high on your last filed tax return, but you recently lost your job. However, it is actually a tax credit for 2020, so if you qualified based on your 2020 income, you’ll benefit when you file your 2020 return (due in April 2021). Better than nothing.
You will receive the payment if you are unemployed or retired and collecting social security, as long as you weren’t phase out due to your income above the threshold.
Expansion of Unemployment Benefits
If you recently lost your job or income, you are probably eligible for expanded unemployment benefits, even if you would not have been under the “old” rules. This is good because a record number of new people filed for unemployment last week!
Unemployment Insurance (UI) is generally run by your state government, but now there is an additional boost to payments from the federal government. The new law provides an additional $600 per week to persons collecting UI for four months. This is on top on the payment from the state. For example, the maximum weekly benefit in NY is $504/week. Now that person would receive $1104/week ($504 + $600). I think this will help a lot of people.
In addition, there is an additional “Pandemic Unemployment Insurance” available. This is available to self-employed persons (while regular UI is not). This is great news for freelancers, contractors and the general “gig economy”.
Finally, there is no longer a one week waiting period required to file for benefits. States are still updating their websites as I write this, but higher benefits and a faster turnaround is good news for people who need money right now.
Retirement Account Distributions and Loans
Coronavirus-Related Distributions of up to $100,000 are available from retirement accounts by individuals who have been impacted by the Coronavirus. The definition of impacted is broad and will apply to many people.
Potential tax benefits associated with Coronavirus-Related Distributions include:
No 10% Penalty for individuals under age of 59 ½
Not Subject to Mandatory Withholding Requirements
Eligible to be Repaid Over 3 Years
Income May Be Spread Over 3 Years
It will also be easier to take loans from employer sponsored retirement (like 401k or 403b) plans this year. The loan limit is doubled to $100,000 and can be up to 100% of the vested account balance. (The previous rule was a maximum of $50,000 and up to 50% of the vested balance). In addition, payments may be delayed up to one year.
Relief for Small Business Owners
The Paycheck Protection Program is a loan for small business owners with less than 500 employees (could be more depending on industry). This allows business owners to borrow 2.5 times their average monthly payroll of the previous year, at a maximum 4% interest rate.
The big potential benefit of this loan is that all or a portion may be forgiveable.
The amount eligible to be forgiven is the amount spent, within 8 weeks after the loan, on:
Payroll costs, excluding prorated amounts for those with compensation greater than $100,000;
Rent pursuant to a lease in force before February 15, 2020;
Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020; and
Group health insurance premiums and other healthcare costs.
To qualify for the forgiveness (aka free money) part, the business must maintain the same number of employees from February to June 2020 as they had before the crisis.
If this sounds like you, apply for this program with an SBA approved lender! The deadline is June 30th.
There is also a payroll tax credit (Employee Retention Credit For Employers Subject To Closure Due to COVID-19). Small businesses qualify if operations of the company have been at least partially suspended during a quarter either as a result of a governmental authority or in which revenue in 2020 has less than 50% of the revenue from the same quarter in 2019. This could apply to businesses – restaurants, retail, construction, etc. There are details relating to the number of employees, but in general the credit is equal to 50% of wages paid to each employee, up to a maximum of $10,000 of wages per employee.
Deferral of payments is another payroll-related tax break. With the exception of employers who have debt forgiven by the CARES Act for certain loans provided by the Small Business Administration, employers could defer payroll taxes from March 27th 2020, until the end of the year. Half of the payroll taxes that would have been paid during this period may be deferred until December 31, 2021, with the remaining half due by December 31, 2022.
Other programs for business owners (not part of the CARES Act but check if applies to you):
Required Minimum Distributions (RMD)
The Act suspends Required Minimum Distributions (RMDs) during 2020. This applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and Governmental 457(b) plans. This applies to both retirement account owners and beneficiary IRA owners.
If a retirement account owner has already taken their RMD for the year and wishes to return it, that is possible. (But let your financial advisor know ASAP because it is simpler if you do it within 60 days of the withdrawal!).
Other Miscellaneous Benefits
Student loans. Payments on Federal student loans may be deferred until September with accruing interest. Note that the borrower must contact the provider to suspend payments.
Health Savings Account Use Expanded. HSA and FSA may now be used for over the counter medications and “menstrual care” products. (Wasn’t expecting that, but okay!)
Medicare Beneficiaries may receive the COVID-19 vaccine (when available) at no cost.
Telehealth services may be temporarily covered (through plan years beginning in 2020) by an HSA-Eligible HDHP before a participant has met their deductible.
During this emergency period, Medicare Part D recipients may request 90-day supplies of medications.
There are many more aspects to the CARES Act, but I have focused here on the ones which will impact at least one of our clients.
We are still digesting this important legislation, but we are hopeful that these new benefits will provide some measure of comfort and financial help to weather this storm.
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