The relief bill known as the CARES Act was signed into law on Friday, March 27, 2020. It is designed to serve as a bridge between the time the US economy decelerates in response to Covid-19 and the time the economy is back up and running. Provisions of the CARES Act support a wide range of individuals and businesses to keep them financially afloat during any tough times ahead. The more successful the CARES Act is, the faster people and businesses can recapture their pre-Covid-19 lives once the public health care crisis becomes manageable.
Much has and will be written and reported about the 800+ pages of the CARES Act and its myriad programs, especially the Recovery Rebates and Pandemic Unemployment Insurance. I want to take a slightly different tack and highlight three key parts of the bill that I believe will be most impactful to our clients. What follows is our interpretation of the rules as of the writing of this blog. Due to the length and complexity of the bill, it is possible the government will need to revise or clarify some wording and provisions going forward. Many thanks to Jeffrey Levine, CPA/PFS, CFP®, CWS®, MSA at Kitces.com for pertinent materials.
1)Required Minimum Distributions (RMDs) Are Waived in 2020
All RMDs have been suspended for 2020. This includes distributions from all retirement plans, traditional IRAs, SEP IRAs and SIMPLE IRAs, as well as stretch beneficiary IRAs. If a charity, estate or trust is taking distributions under the 5-Year Rule, 2020 will not count as one of those five years.
This means you are not required to take an RMD this year, if you do not need the money. To end distributions, you should stop any automatic withdrawals. These could be monthly payments or lump sum distributions you are scheduled to receive between now and the end of the year. (StrategicPoint will work with our custodian Fidelity and our clients to follow their desired instructions). Of course, anyone who is including their RMD in their budget can continue to withdraw from their accounts.
Question: What if I already took (a portion of) my RMD this year, can I put it back into my account? There are two ways to return your RMDs to your account if you have already taken them.
- The first is to complete a 60-day indirect rollover by writing a check or transferring the full amount (including withheld taxes) back into the account. (An indirect rollover is one where you have taken actual possession of the money, as RMDs provide.) Only one indirect rollover is allowed within a 365-day period, before penalties apply, so only do this once.
- If you took your RMD in January (beyond the 60 days or any time up until now) and want to return it, there is a second possibility called the Coronavirus-Related Distribution. It is available to those who can claim they needed the money for a variety of Covid-19 related circumstances (diagnosis, experiencing adverse financial effects of quarantines, business closures, etc.). If you qualify, you will have three years to return the money and pay the taxes. At this point it is probably advisable to wait until the “how this provision works in practice” rules are further defined before attempting to return distributions this way. At the same time Coronavirus-Related Distributions (penalty free and taxable over three years) are not limited to RMDs. Anyone who is eligible can withdraw up to $100,000 from their IRAs and retirement plans during 2020.
Question: Does the suspension of RMDs in 2020 impact Qualified Charitable Distributions?
- QCDs are gifts made directly from IRAs to charitable organizations. They are not subject to tax withholding and are not reported as taxable income on the donor’s tax return. Under the CARES Act, QCDs should not be impacted. Those eligible in normal times (you must be 70.5 years or older) should be able to complete their QCDs this year and not have them count as income.
2)Payroll Protection Program and Forgivable Loans
Keeping small businesses afloat is an important part of the CARES Act. As a result of shutdowns, closings, and sheltering-in-place policies, many small businesses are not operating and/or being forced to lay off workers. The CARES Act wants to encourage small businesses to retain workers over this period of limbo and be ready to deploy their people and resources when the economy ramps up again.
The Paycheck Protection Program offers (partially) forgivable 7(a) small business loans at low interest rates (maximum 4%) for up to ten years. Loan repayments are deferred for at least 6 months (but not over a year) and are administered by the Small Business Administration and certified related lenders. To be eligible your business generally must have fewer than 500 employees (yes, sole proprietors are eligible too!).
The maximum amount of the loan is the smaller of $10 million or 2.5 times last year’s payroll costs (excluding amounts over $100,000 for any one individual). The loans can be used for a variety of costs that keep the business running even at reduced capacity. Since most small business loans are granted at interest rates higher than 4%, this can be a good deal.
Now for the forgiveness part. Up to 100% of the following expenses paid in the first 8 weeks of the loan is forgiven with one caveat. The expenses include:
- Payroll costs covering up to $100,000 for any one employee
- Rent (if substantiated by a lease in effect before 2/15.2020). (Note: mortgage interest is not forgiven, although the loan can be used to pay for this)
- Utilities, transportation, internet access for services begun before 2/15/2020
- Group health insurance premiums and related healthcare costs
The caveat is that the business must retain the same number of employees that it had between February 15 and June 30, 2019 or between January 1 and February 15, 2020. The amount forgiven is reduced ratably for fewer employees. If a business has already laid off employees and wants to bring them back immediately, our understanding is that this will be allowed (although the time frame, mechanism, etc. for doing this is not clear at this point).
Question: Isn’t loan forgiveness taxable to the loan recipient?
Normally, yes. But the CARES Act does not require forgiven amounts to be reportable as income.
Question: Are there any other ways I can save money as a small business?
Yes, there are two other ways:
- As an alternative to the SBA forgivable loan, the CARES Act offers a new payroll tax credit (up to $10,000 of wages per employee) called the Employee Retention Credit for Employers Subject to Closure Due to Covid-19. The credit is tied to the amount of revenue lost in business fully or partially suspended and is designed to discourage further layoffs.
- Also, as an alternative to the SBA forgivable loan, employers can defer payroll taxes (the employer portion of Social Security and Medicare taxes) from March 27, 2020 until December 31, 2020. The taxes would be payable half before 12/31/2021 and the other half by 12/31/2022.
3)Suspension of Student Loan Payments
A number of our clients have children with student loans, have student loans themselves or are helping their children and grandchildren pay for student loans. It is therefore good news that the CARES Act defers required student loan payments until September 30, 2020. During this time there will be no accrual of interest on the loans. The one key caveat here is that the suspension, in practice, does not happen without action on the part of the borrower. Holders of student loans must reach out to their lenders and stop any automatic payments until September 30th. Otherwise the loan payments will likely continue to be made.
Question: What happens if someone is accelerating payments on their student loans?
Voluntary payments are permitted during the suspension window. This means that borrowers should reduce their payments only by the amount required each month.
Question: Are there any other sources of assistance for student loans?
Yes. From now until the end of the year employers can expand the range of education assistance programs to include student loans (maximum $5,250 tax-free per employee).
The CARES ACT is a massive $2 T bill, covering allocation of funds directly to individuals, households, small businesses, larger corporations, and state and local governments. It also covers provisions involving retirement accounts, student loans, charitable contributions, healthcare, and education. It is entirely possible limits and dates in the bill will be extended or added to in future legislation.
Over the coming weeks StrategicPoint will continue to research how the CARES Act can be helpful to our clients, their families and communities. What we learn we will share with you individually, in blogs and through our new Podcast The Novice and the Nerd. The latest edition includes a discussion of the CARES Act, including who will be receiving rebates, changes to unemployment and how RMDs will be affected.
Betsey A. Purinton, CFP®
Chief Investment Officer
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