CARES Act: What Families and Business Owners Need to Know

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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.

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The Setting Every Community Up For Retirement Enhancement Act of 2019 (The SECURE Act)

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The SECURE Act which went into effect on January 12, 2020 made a number of changes to laws that will effect the retirement of nearly every American. Most notable was the elimination of Stretch IRA’s, which will now force most non-spouse beneficiaries to withdraw inherited IRA balances in a 10 year timeframe. Other significant IRA changes was increasing the age that Required Minimum Distributions (RMD’s) must begin from 70 ½ to 72 as well as repealing the age limit for making Traditional IRA contributions. Additionally, many changes were passed that will effect employer-sponsored qualified plans along with many other miscellaneous changes. In this article, we outline the key changes in the act and what they mean to you.

TITLE I: Expanding and Preserving Retirement Savings

Section 102.  Simplification of Safe Harbor 401(k) Rules 

The legislation changes the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection and facilitate plan adoption. The legislation eliminates the safe harbor notice requirement, but maintains the requirement to allow employees to make or change an election at least once per year.  The bill also permits amendments to nonelective status at any time before the 30th day before the close of the plan year.  Amendments after that time would be allowed if the amendment provides (1) a nonelective contribution of at least four percent of compensation (rather than at least three percent) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year. 

Section 103.  Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs 

Increasing the credit for plan start-up costs will make it more affordable for small businesses to set up retirement plans. The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years. 

Section 104.  Small Employer Automatic Enrollment Credit  

Automatic enrollment is shown to increase employee participation and higher retirement savings. The legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment.  The credit is in addition to the plan start-up credit allowed under present law and would be available for three years.  The credit would also be available to employers that convert an existing plan to an automatic enrollment design. 

Section 105.  Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes  

Stipends and non-tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation and cannot be used as the basis for IRA contributions. The legislation removes this obstacle to retirement savings by taking such amounts that are includible in income into account for IRA contribution purposes. The change will enable these students to begin saving for retirement and accumulate tax-favored retirement savings. 

Section 106.  Repeal of Maximum Age for Traditional IRA Contributions 

The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.  As Americans live longer, an increasing number continue employment beyond traditional retirement age.   

Section 108.  Portability of Lifetime Income Options  

The legislation permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan.  The change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees. 

Section 109.  Treatment of Custodial Accounts on Termination of Section 403(b) Plans 

Under the provision, not later than six months after the date of enactment, Treasury will issue guidance under which if an employer terminates a 403(b) custodial account, the distribution needed to effectuate the plan termination may be the distribution of an individual custodial account in kind to a participant or beneficiary. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out, subject to the 403(b) rules in effect at the time that the individual custodial account is distributed. The Treasury guidance shall be retroactively effective for taxable years beginning after December 31, 2008. 

Section 111.  Allowing Long-term Part-time Workers to Participate in 401(k) Plans 

Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees.  As women are more likely than men to work part-time, these rules can be quite harmful for women in preparing for retirement.  Except in the case of collectively bargained plans, the bill will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules. 

Section 112.  Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption  

The legislation provides for penalty-free withdrawals from retirement plans for any “qualified birth or adoption distributions.” 

Section 113.  Increase in Age for Required Beginning Date for Mandatory Distributions 

Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.  However, the age 70 ½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy.  The bill increases the required minimum distribution age from 70 ½ to 72. 

Section 115.  Treating Excluded Difficulty of Care Payments as Compensation for Determining Retirement Contribution Limitations 

Many home healthcare workers do not have a taxable income because their only compensation comes from “difficulty of care” payments exempt from taxation under Code section 131.  Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA.  This provision would allow home healthcare workers to contribute to a plan or IRA by amending Code sections 415(c) and 408(o) to provide that tax exempt difficulty of care payments are treated as compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs.   

TITLE II: Administrative Improvements

Section 201.  Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year  

The legislation permits businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable year.  The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings. 

 Section 202.  Combined Annual Reports for Group of Plan 

The legislation directs the IRS and DOL to effectuate the filing of a consolidated Form 5500 for similar plans.  Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries.  The change will reduce aggregate administrative costs, making it easier for small employers to sponsor a retirement plan and thus improving retirement savings. 

Section 204.  Fiduciary Safe Harbor for Selection of Lifetime Income Provider 

The legislation provides certainty for plan sponsors in the selection of lifetime income providers, a fiduciary act under ERISA.  Under the bill, fiduciaries are afforded an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract and are protected from liability for any losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract.  Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a defined contribution plan. 

 Section 205.  Modification of Nondiscrimination Rules to Protect Older, Longer Service Participation  

The legislation modifies the nondiscrimination rules with respect to closed plans to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer service employees as they near retirement. 

TITLE III: Other Benefits

Section 302.  Expansion of Section 529 Plans 

The legislation expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.  

TITLE IV: Revenue Provisions

Section 401.  Modifications to Required Minimum Distribution Rules  

The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner.  Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.   

Section 402.  Increase in Penalty for Failure to File  

The legislation increases the failure to file penalty to the lesser of $400 or 100 percent of the amount of the tax due.  Increasing the penalties will encourage the filing of timely and accurate returns which, in turn, will improve overall tax administration. 

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