The Coronavirus Aid, Relief and Economic Security Act (CARES)

Many of us have been focused on staying healthy and doing our part to slow the spread of the virus. However the efforts to flatten the curve have also flattened the US Economy. Not just flatten, but completely halt most US commerce. The uncertainty of the timeline for this halt has caused the stock market to crash and also caused major layoffs especially in the service sector, where businesses are not allow to operate. Small businesses and their employees are the hardest hit effecting hourly workers and middle class the hardest. The Legislature has passed a series of 3 relief packages to assist individuals and small businesses through this time of uncertainty. The purpose of the packages are to assist small to mid size companies by covering the cost of rent/mortgage payment, utilities, staffing and benefits for a 2 month period. Most small businesses have about 2 weeks of cash to cover slow downs in their businesses. Very few are equipped to pay business operations during a crisis such as this where they could have a total economic loss for months. This allows small businesses to stay afloat and allows their employees to stay home and still pay their bills.

Below are some highlights of the CARES ACT. If you own a small business, it is important that you contact your banker and/or CPA as soon as possible to apply for the loans. The loans may be forgivable if certain criteria are met.

$301 billion in direct payments to households
Qualifying individual and joint filers eligible for advanced tax credit rebates of $1,200 individuals and $2,400 joint, increased by $500 for each dependent child. (16 and under)
Phase-out will begin for individuals and joint filers at $75,000 and $150,000 respectively, and become completely phased out at $99,000 and $198,000 respectively.
2019 income tax return filing will be used to see who qualifies. If you have not filed your 2019 return yet, 2018 will be used. If you used a bank account for direct deposit or tax payment, the direct payments will be automatically deposited into your account.
The payment you receive acts as an advanced payment of a credit you will compute AGAIN on your 2020 return. If you did not qualify to receive the advanced payment because your income was too high in 2018 or 2019, you will get a credit when you file your 2020 return if your income in 2020 is below the thresholds. This is good news if you were laid off in 2020 but had income too high in 2018 or 2019 to get a relief check. No guidance yet on whether or not you will have to pay the advance back if your income goes up in 2020.

$349 billion in loans to small businesses
Includes some expansion of SBA Economic Impact Disaster Loan Program
Includes expansion of the SBA 7(a) loan program called the Paycheck Protection Program
Maximum loan amounts will be the lesser of $10 million or 2.5x average monthly payroll for the previous year
Funds can be used to fund payroll and most related benefits, including insurance premiums, mortgage payments, rents and utilities
Funds spent on payroll costs, interest on mortgages, rent, and utilities for the 8 week period following loan origination could be forgivable
Unforgiven amounts to convert into a loan with repayment period not to exceed 10 years and interest not to exceed 4%
Will be required to maintain employee count and wage level to obtain forgiveness

$221 billion in a variety of tax benefits to businesses
Employers and self-employed individuals will be able to defer payments of the employer share (6.2% of employee wages) of Social Security payroll taxes that would have otherwise been owed from the date of enactment of the legislation through December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period, with half the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. Keep in mind this is just a deferment and taxes must eventually be paid.

$250 billion of expanded unemployment insurance benefits
Expansion of $600/week of unemployment compensation for up to 4 months
Expansion to provide an additional 13 weeks of unemployment benefits beyond current state law
Expansion of unemployment recipients to include self-employed, independent contractors, and other persons not previously eligible.

$150 billion direct aid to states

Again, please contact your tax preparer to see if you will qualify for any of these benefits.

CARES Act – Use of IRA and Retirement Plan Funds

We previously sent you information on individual and small business relief due to the COVID-19 crisis. In addition to direct payments and small business loans, the CARES Act also allows for some provisions to access to IRAs and retirement plans. Below is a summary of the provisions that deal with retirement accounts:

Extended Contribution Date

The IRS has extended the tax deadline for filing 2019 returns and payment of taxes from 04/15/2020 to 07/15/2020. 2019 IRA and HSA contributions are also being extended until 07/15/2020.

Waiver of 10% Early Withdrawal Penalty for distributions made before age 59.5 for coronavirus-related distributions up to $100,000 per individual. This limit is applied across all retirement accounts. IRAs and plans will be combined to reach the $100,000 limit.

The penalty waiver applies to distributions from IRAs, 401(k), 401(a), 457(b) and 403(b) plans.
Distributions are still taxable, but the tax can be spread out over 3 years. A distribution can be repaid within three years of the date of distribution to any plan or IRA to which a rollover contribution can be made. Repayments will be treated as rollover contributions. Distributions do not have to be repaid, it is optional and amended tax returns may need to be filed if repayments are made in subsequent years.
A coronavirus-related distribution includes any distributions made in 2020 to a person who has one of the following:
A personal diagnosis of COVID-19
A spouse or dependent who has been diagnosed with COVID-19
Adverse financial consequences due to being furloughed, quarantined or laid off or having paid work hours reduced due to coronavirus or the close or reduction of a business due to coronavirus.

Increased Plan Loan Limit and Extension of Repayment Period

A Qualified loan is any new or pre-existing loan to a person who would be eligible to receive a coronavirus-related distribution.
The maximum loan amount for loans is increased from 50% of vested balance up to $50,000 to 100% of vested balance up to $100,000.
Allow participants to delay repayment of a loan for up to one year.
You have up to 180 days from date of enactment of this bill to take out a plan loan.

Temporary Waiver of RMDs

Any RMD required to be made in calendar year 2020 is waived. This includes RMDs due as a death benefit in accordance with the 5 and 10 year rules, and those time limits are extended by one year.
If a distribution is made in 2020 prior to this legislation that would have been treated as an RMD but for the 2020 waiver, it can be rolled over in accordance with the 60-day rollover rules. We anticipate that the 60 day rule may be extended to include all distributions taken during 2020 but we don’t have this guidance yet. If you have taken an RMD within the past 60 days, let us know if you would like to put the money back into the IRA.If you haven’t taken your RMD for 2020, please let us know if you wish to not take your RMD for 2020 so we can stop these automatic payments.
Applies to IRAs, 401(k), 403(b) and 457(b) plans.

We hope everyone is staying safe and healthy during this unprecedented tragedy. Please give us a call if you have any questions regarding these new provisions.

Sincerely,
The Ahrens Investment Partners Team