CARES Act: What Families and Business Owners Need to Know

The massive $2 trillion stimulus package that was recently passed to help Americans through the Coronavirus pandemic affects every business and individual in our country one way or another. It is roughly 3 times as great as what we received from the great recession that began in 2008. One of the primary differences of the recent stimulus is that it is going mostly to the low and middle-income consumers and small business owners as you can see from the diagram below. This is very different than 2008 when the fiscal stimulus didn’t really trickle down to these cohorts that are more inclined to spend it. 

We have summarized some of the key portions of the CARES Act that we feel will be most pertinent to you.

Federal Tax Filing Deadline Extended

The federal tax filing deadline has been extended to July 15th. You don’t have to file your return or make payments until then. The extended deadline applies to 2019 IRA, Roth IRA, and employer profit-sharing contribution deadlines as well. 

While California has extended their deadline, not all states have followed suit. You can find your state’s filing deadline here.

Stimulus Checks

Single adults who have an adjusted gross income of $75,000 or less will get the full $1,200, while married couples with no children and earning $150,000 or less will receive a total of $2,400. For every qualifying child age 16 or under, you get another $500.

People who earn more will see their payments decrease until they phase out completely. That happens for single people earning $99,000 or married people who have no children and earn $198,000. Your 2018 or 2019 Adjusted Gross Income amount will be the determining factor.

However, if you make under those thresholds in 2020 – you actually will be eligible when you file your 2020 tax return, so you will have to be a bit patient.

There are other situations that make certain people ineligible — college-age children who were claimed as dependents on their parents’ returns won’t receive a check, for example. And you generally need a valid Social Security number to collect as well.

Most people don’t have to do anything to receive the payment. If the Internal Revenue Service already has your bank account information (i.e. you get your tax refunds direct deposited), it will transfer the money to you via direct deposit based on the recent income-tax figures it already has. Payments are expected to start landing within the next few weeks.

Retirement Plans

IRA and qualified plan distributions – A qualified individual can take up to $100,000 in “coronavirus-related” distributions in 2020 and: 

  • Not have to pay the 10% early distribution penalty even if you are under age 59½; and
  • Not have to withhold 20% in federal income taxes; and
  • Not have to pay tax on it if repaid within three years; or
  • Elect to spread the inclusion of income over three years.

Qualified plan loans – Another option is to borrow from your retirement plan.  The CARES Act increased the loan maximum from $50,000 or 50% of your vested balance to $100,000 or 100% of your vested balance.  This is for any money borrowed between March 27, 2020 and December 31, 2020. For individuals with existing loans, the due date for the loan repayment is suspended one year. 

Taking a loan means liquidating securities in your portfolio and with most asset classes down year-to-date, you risk the chance of selling at a loss and missing the rebound. Make sure to consider other types of loans you may be eligible for before taking a qualified plan loan.

RMD’s suspended this year – The Act suspended the minimum distribution requirements for 2020.  This includes distributions from most qualified retirement plans (but not nongovernmental 457(b) plans) and IRAs, including inherited IRAs. 

As a reminder, the recently enacted SECURE Act (January 1st, 2020) changed the required beginning date from 70½ to 72, but this change only applied if you had not yet turned 70½ before 2020.  

The key takeaway here is that if you had already started taking your mandatory distributions or you had an inherited IRA, you don’t have to take a distribution in 2020.  This gives you the chance to let your plan balance recover from the downturn in the stock market before you take any money out. It also allows you to save money on taxes or you consider a Roth conversion as an alternative.

If you already took your required distribution from your IRA in 2020, you have 60 days from the date of the distribution to put it back and not be taxed on it. Roth conversions in lieu of distributions this year is another option that can make sense, depending on your tax situation.

Unemployment Insurance

The new stimulus made significant, albeit temporary, changes to the way the unemployment insurance system works and increases benefit amounts until July 31st. It temporarily increases the amount of benefits by $600 weekly. 

It also extends by up to 13 weeks the time period for which state-level benefits are available for many workers. States set many of their own rules, including benefit amounts. You should visit your state’s employment development office website for more specific information.

Federal Student Loans

Borrowers of federal student loans will be placed in administrative forbearance, which allows you to temporarily stop making payments from March 13th until September 30th. No interest will accrue during this period and interest that you accrued before the period began will also not be rolled into your loan principal. Borrowers can continue making loan payments to pay down balances faster if the full amount of your payment can be applied towards your loan’s principal. 

Loans issued through state agencies and others, including big private lenders like Sallie Mae, are not covered. Other loans not covered include the majority of Federal Family Education Loans, which are mostly held by commercial lenders, and school-held Perkins loans. 

Some private lenders are offering relief programs, such as Sallie Mae who is offering suspension of payment for up to three months, with no damage to a borrower’s credit. Navient made an identical offer for “qualified” borrowers. It’s advisable to contact your lender to determine what relief programs are available to you.

Housing Payments

The Federal Housing Finance Agency has instructed mortgage servicers to allow borrowers whose mortgages are owned by Fannie Mae or Freddie Mac to delay payments. This program allows for a mortgage payment to be suspended for up to 12 months due to hardship caused by the coronavirus.

Federal housing officials have also announced a nationwide eviction and foreclosure moratorium for borrowers of Fannie or Freddie mortgages or borrowers whose loans are backed by the Federal Housing Administration (F.H.A. loans).

A nationwide eviction moratorium is in place for any renters whose landlords have mortgages backed or owned by Fannie, Freddie or the F.H.A. This will last through the end of July, and landlords can’t charge any fees or penalties for nonpayment of rent either.

Business Owners

Small business owners (under 500 employees) were a key demographic targeted by the stimulus and relief is being made available through up to $10million in forgivable loans to cover employee payroll or immediate tax credits – you cannot receive both, however.

Paycheck Protection Program The CARES Act allocated $350 billion to small businesses under the Paycheck Protection Program. This program provides 100% federally guaranteed loans to small businesses with the goal of helping them keep their employees employed during the COVID-19 pandemic and any resulting economic downturn. 

The program is administered by the Small Business Administration (SBA) and started accepting applications on April 3, 2020. A key feature of this program is that all or part of the loan may be completely forgiven.

To qualify for loan forgiveness, the loan proceeds must be used to cover payroll costs, mortgage interest, rent or utility costs over the 10 week period after the loan is made. Additionally, the number of employees and compensation levels must be maintained.

The loans can be for an amount up to 2.5 times the employer’s average payroll costs, not to exceed $10 million. Payroll is capped at a $100k rate per employee and the number of employees is capped at 500.

The amount of loan forgiveness may be reduced if there is a reduction in the number of employees or a reduction greater than 25% in the amount of wages paid to the employees of the business. Any reduction in the amount of loan forgiveness can be reduced or eliminated if the business restores the reduced wages or brings back any laid-off employees by June 30, 2020. All small businesses and even self-employed independent contractors are eligible for the loans.

Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. This is a great deal for small business owners that qualify.

Employee Retention Credit – The bill offers a refundable payroll tax credit of up to $10,000 of wages paid to an eligible employee during the crisis. This credit is available for both for-profit and non-profit businesses and is available to all employers regardless of size. 

To be eligible, businesses must fall into one of the two categories:

  1. The employer’s business must have been disrupted by government restrictions that have resulted in a full or partial suspension of their business operations. 
  2. The employer’s gross receipts have gone down by over 50% year-over-year beginning from the same quarter in 2019. Once gross receipts go above 80% of the same quarter in 2019, the employer becomes ineligible for the credit at the end of that quarter.

The wages of employees who were either furloughed or whose hours have been reduced are eligible for the credit. For employers with 100 or fewer employees, all employee wages for full-time employees are eligible regardless of whether the employee was furloughed.

The amount of the credit is 50% of qualified wages capped at $10,000 paid to an employee after March 12, 2020, and before Jan. 1, 2021. Eligible wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care. The employer will receive the credits, and any refund if eligible, through their quarterly payroll tax filings.

As we continue the fight against coronavirus in our country and globally, one thing has become fairly clear: social distancing and shelter in place guidance have seemed to be the most effective tools to combat the spread of the virus. The dilemma is that the longer we continue with most of the economy shut down, the greater the financial impact. At some point,  the economy will have to reopen. The manner in how we assimilate back to our normal lives will have a strong influence in continuing to control the spread of the virus. As the situation continues to develop, it is very plausible that more stimulus could come our way this year. We will continue to keep you posted on how these changes impact you. Stay safe and remember to be extra kind to one another in the face of these challenging times. 



Author: Danny Michael
Danny G. Michael has 17 years of experience as an advisor working with individuals, families and business owners. Danny has also been a Certified Financial Planner™ since 2006 and is also an Accredited Investment Fiduciary.

Leave a Reply