CARES ACT EXPLAINED
On Friday, March 27 President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law. The CARES Act has many elements intended to aid American workers, small businesses, corporations and the healthcare system in dealing with the coronavirus pandemic. As the massive $2.2 trillion stimulus bill, representing approximately 9% of our GDP, is the largest economic rescue package since the Great Depression, there is a lot to dissect. Here is the information we are focused on that may help you and your family.
Relief on Retirement Plans
- Waiver of Required Minimum Distributions (RMDs) in 2020. Individuals with employer sponsored retirement plans or IRAs, are NOT required to take RMDs in 2020. This RMD waiver also applies to individuals who turned 70½ in 2019 but did not take their RMD before January 1, 2020. Beneficiaries of inherited Traditional & Roth IRAs are also included in the RMD waiver.
Read this if you have already taken your RMD in 2020. Because of the CARES Act RMD waiver, your distribution may not be considered an RMD. This means the RMD can be put back into your account as long certain conditions are met: 1) The rollover must occur within 60 days of the day you received the RMD; and 2) You must not have rolled over a similar distribution within 12 months. If both conditions are met, you should be able to replace your RMD.
- Income tax return filing and tax payment deadline is extended. The filing deadline and payments due by tax-filers has been moved from April 15, 2020, to July 15, 2020.
This includes the ability to make IRA & Roth IRA, HSA and certain employer plan contributions up until July 15 for 2019’s tax year.
- Retirement plan distributions may be exempt from the 10% early distribution penalty up to $100,000 per person. The Coronavirus-Related Distribution (CRD) specification must apply (see below), and tax is still due on pre-tax account distributions but can be spread evenly over three years. The distributed funds CAN be repaid anytime during the three years. If you have already paid taxes on a withdrawal that you later decide to repay, you can file an amended tax return to recover the taxes.
A CRD is defined as: any distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual. Qualified individuals include:
- an individual, spouse or dependent of that individual, who is diagnosed with COVID-19 or SARS-CoV-2 in an approved test by the CDC; or
- an individual who experiences “adverse financial consequences”, due to being quarantined, being furloughed or laid off or having work hours reduced, being unable to work due to lack of child care, or closing or reducing hours of a business owned or operated by the individual.
Retirement Plan Administrators may rely on an individual’s written certification that the individual qualifies for a coronavirus-related distribution under these categories.
- Loan relief for company sponsored retirement plans. If you participate in a company sponsored plan that allows loans, the maximum amount of any loan taken between March 27, 2020 and September 23, 2020 (180 days) is increased to the lesser of: 1) 100% of your vested account balance; or 2) $100,000 (this is reduced by any outstanding loans). In addition, retirement plan loan repayment dates taken between March 27, 2020 and December 31, 2020, can be delayed for one year. The five-year loan payback period will begin one year following the date of your qualifying loan.
Employer sponsored retirement plans are NOT required to allow participant loans or allow for participant loans under the higher limits authorized under the CARES Act. Plans may, but are not required to, offer the relief described above and need not amend the retirement plan in advance.
Financial Stimulus for Individuals
- One-time Cash Payments. Individuals & families making under specified income limits may qualify for a one-time stimulus payment. Below are the income limits based on your tax-filing status:
Most Individual-filers making less than $75,000 will receive a one-time payment of $1,200; This amount is reduced if your income is greater than $75,000 and no payment will be received if your income is greater than $99,000.
Most Married-filers making less than $150,000 will receive a one-time payment of $2,400; This amount is reduced if your income is greater than $150,000 and fully phased-out if your income is greater than $198,000.
An additional payment can be received of $500 per dependent children who are 16 and under.
Income is based on your adjusted gross income (AGI) from your most recent tax return: 2018 or 2019. If the Federal government has your direct deposit information, you’ll receive your check electronically, meaning faster. Otherwise, it will be sent via postal mail. If you’ve filed tax returns electronically in 2018 or 2019, the government will have your direct deposit information.
- Unemployment insurance expansion. States can increase unemployment benefits by up to $600 per week for up to four months. Benefits will also be extended to self-employed workers, independent contractors, and those with limited work history.
- Student loan relief. Payments and interest on all federal loans held by the U.S. Department of Education will be suspended for six months, until September 30, 2020. This will be automatic, so you don’t have to request it. (This only applies to federally-backed loans, not private student loans.)
- Paid employee leave. The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with paid sick leave or expanded family leave related to COVID-19 until December 31, 2020.
- Individuals not taking the standard deduction. The Act also contains a temporary increase for 2020 on the charitable contribution deduction limit for cash contributions. The Act permits a charitable contribution deduction for individuals for cash contributions of up to 100% of adjusted gross income rather than up to 60% of such amount. Any excess may be carried forward for up to five succeeding tax years.
Relief for Businesses
As the legislation included in the CARES Act pertaining to businesses is the most complicated, we have compiled the main components of interest to business owners. To answer the question up front of what businesses are eligible for relief, the short answer is – nearly all. Congress, through the Small Business Administration (SBA) and local banks, included $377 billion in forgivable low-interest (less than 4%) loans for small and medium-sized businesses striving to maintain operations. Much of the act is aimed at businesses with fewer than 500 employees, although there may be exceptions for certain industries. Special provisions are also included for large businesses in troubled industries, such as airlines. Sole proprietors and independent contractors are also eligible.
- Deferral of employer payroll taxes. An employer can delay payment of the employer’s portion of payroll tax through the end of the year. This tax payment is delayed and not waived meaning it will be required that 50% be repaid by 12/31/2021 and the remaining 50% by 12/31/2022.
- Small Business Administration (SBA) loans. Through the end of the year, the Act extends SBA loans to any business, private nonprofit, or public nonprofit organization with under 500 employees. Borrowers may receive loans equal to 2½ times their monthly payroll, mortgage, rent and debt payment expense, up to $10 million. Borrowers can use these loans for a broad range of business expenses including payroll, paid sick leave, mortgage, rent, utilities and payments on existing debts.
The SBA shall not collect fees for these loans to the maximum extent possible and will waive prepayment penalties. These emergency loans are 100% guaranteed through the end of the year, then guaranteed up to 85% of the original loan depending on loan size. Payments on the loans can be deferred up to one year.
- Employee retention credit. For employers subject to closure due to COVID-19, the CARES Act includes a credit for disrupted operations to the extent employees are maintained on payroll. These employers will receive a refundable credit for an amount equal to 50% of the qualified wages for each employee, up to a maximum of $10,000 of qualified wages per employee. This means up to a $5,000 benefit to the employer with respect to each employee. This provision, applies to employers carrying on a trade or business in 2020, and either: 1) with respect to any calendar quarter, the operation of the trade or business is fully or partially suspended due to COVID-19 orders from an appropriate governmental authority; or 2) gross receipts decline as stated in the Act. The credit applies to wages paid after March 12, 2020 and through December 31, 2020.
The CARES Act stimulus package should help inject liquidity to the people who need it most: workers, small business owners and corporations. If you believe that any of the above relief provisions apply to you, please contact our office to discuss how you can best use these provisions to your advantage.
Jon Launder, CFP®
This material is for use with the general public and is designed for informational or educational purposes only. The information and views provided in this material do not necessarily reflect the views or opinions of Lincoln Financial Group or Lincoln Financial Securities. It is not intended as legal, tax, estate or investment advice. Lincoln Financial Securities and their respective employees, representatives, and/or insurance agents do not provide estate, tax, accounting, or legal advice. Individuals should consult an independent lawyer or advisor as to any tax, accounting, or legal statements made herein.