03 Apr 2020 What the CARES Act Means For You

Yesterday morning at 8:30am the Labor Department released the absolutely bewildering number of last week’s initial jobless claims: 6.6 million. The week before that it was 3.3 million. These numbers are so high (and likely to go much higher) that it’s hard to put them in a chart without breaking it:

All that to say, things are bad! It’s as if the opening line from T.S. Eliot’s The Waste Land (“April is the cruellest month…”) is weaving itself into the fabric of the year 2020. And while I am still firmly optimistic about the long-term growth trajectory of our economy and the capital markets (among other, more important realities), I don’t see any reason to deny that right now, and likely for the near future, things are bad. I’ve had too many calls with clients and family and friends who’ve been laid off or fear being laid off to pretend otherwise.

So what, then? Do we just sit back and devolve into a black hole of pessimism and anxiety and self-pity? Nope. We’re going to turn Twitter off, confine our consumption of news to a small sliver of time, and roll up our sleeves. We’re going work together to take care of each other.

Toward that end, we’ve got some work to do to digest the Federal Government’s response to all this. On Friday, in the midst of the economic carnage, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which amounts to some $2 trillion dollars of economic stimulus focusing on individuals and small businesses. It’s a wide-ranging piece of legislation which will impact almost everyone, so we won’t be able to touch on each specific bit of it here, but we hope you will contact us if you have questions.

The super-high level summary for those of you who don’t have time to get through this is:

• Some 90% of taxpayers will get “recovery rebates” based on their AGI and whether they have dependent children. These cash payments will likely not hit accounts until sometime in late April or May at the earliest, and you can calculate your expected amount here if you like.
• “Coronavirus-Related Distributions” up to $100,000 from IRAs and employer-sponsored retirement plans (or both) that otherwise would have been subject to the 10% penalty will not be in 2020.
• RMDs will not be required in 2020 and there will be some provision for those who have already taken RMDs in 2020 (but don’t need them) to put them back in.
• Student Loan repayments have been deferred until September 30, 2020.
• Unemployment Benefits have been significantly expanded in scope (who is eligible), timing (how long they can be claimed), and amount (how much).
• Small Businesses have a number of benefits for which they are eligible for under the Act, from low-interest and potentially forgivable loans through the Small Business Association (SBA), to a payroll tax credit, to the deferral of payroll taxes over a period of nearly three years.
• Miscellaneous other benefits exist under the Act, including a $300 “above the line” charitable tax deduction available to those who take the standard deduction, the expansion of “qualifying medical expenses” for purposes of HSAs and other healthcare related accounts, as well as several other healthcare-related provisions.

And for a bit more color, keep reading!

Recovery Rebates for Individuals

In what is perhaps the clearest indication of where we stand, some 90% of taxpayers will receive a cash payment from the Federal Government, the amount being dependent on filing status, AGI, and the number of dependent children under the age of 17 the taxpayer has.

• For taxpayers filing as single, the rebate will be up to $1,200, reduced by $5 for every $100 of additional AGI over $75,000 (meaning at $99,000 of AGI the rebate goes to zero)
• For taxpayers filing as head of household, the rebate will be up to $1,200, plus an additional $500 rebate per dependent child under the age of 17. The total rebate will be reduced by $5 for every $100 of additional AGI over $112,500.
• For taxpayers filing as married filing jointly, the rebate up to $2,400, plus an additional $500 rebate per dependent child under the age of 17. The total rebate will be reduced by $5 per every $100 of additional AGI over $150,000.
• The AGI figure will be based on the most recently filed tax return (2018 or 2019), which may lead to some weird outcomes. For example, it’s easy to foresee someone’s income having been too high in 2019 to qualify for all or any of the rebate, but they were just laid off and will definitely qualify based on 2020’s AGI. In that scenario the taxpayer won’t be “made right” until this time next year when they are actually filing their 2020 tax return. Conversely, those who qualified based on 2019 AGI levels but who for some reason may have higher income in 2020 that would otherwise disqualify them from receiving the rebate will not have the rebate “clawed back” come this time next year when they file their 2020 tax returns.

The CARES Act requires these recovery rebate payments be made as soon as possible, but there doesn’t appear to be any sort of firm timeline in place yet. We’ve seen conjecture on anything from the third week of April to sometime in mid-May at the earliest. We’ll keep an eye on this. The most common scenario will be that the payment is made directly to an account on file with the IRS used to receive normal tax refunds (or the account in which Social Security deposits are being made monthly), but to the extent checks need to be mailed expect a much longer wait.

Coronavirus-Related Distributions

The next major source of relief comes in the form of “Coronavirus-related distributions” from IRAs and employer-sponsored retirement plans like 401(k)s and 403(b)s. This section of the Act allows distributions from these accounts that would otherwise be subject to a 10% penalty to come out penalty-free. In addition, while these distributions are subject to ordinary income taxes, there won’t be the typical mandatory withholding that comes from such distributions, and the distributions will be eligible for “payback” over the next three years (meaning that you could replace the distribution at a later point and incur no tax at all). If there is no intent or ability to “pay back” the distribution, the taxpayer can elect to either report the total amount of the distribution as income in 2020, or to spread it ratably over three years.

In order to qualify as a “Coronavirus-related distribution” keep in mind the following:

• The distribution must be made in 2020;
• Because of Coronavirus (Congress clearly intended this to be a sufficiently broad requirement to cover an overwhelming majority of the population, but do consult with your tax preparer for further clarification); and
• In an amount not exceeding $100,000.

Loans from Employer-Sponsored Plans. The Act also made adjustments to rules around loans from employer-sponsored retirement plans, increasing the total allowable amount from $50,000 to $100,000, and doing away with the relative percentage of the account’s vested balance eligible to be loaned (which had been 50%). In addition, any loan repayments that would have come due between the enactment date of the Act and the end of 2020 may be deferred for up to one year. The same broad definition of “Coronavirus-related” as applied to IRA and employer-sponsored plan distributions discussed above applies here.

Required Minimum Distributions (RMDs)

RMDs that were to be made in 2020 are no longer required. Regular distributions are still allowed of course, but this provision is likely to be a boon to those who don’t need to spend from tax deferred dollars in IRAs or employer-sponsored plans and can choose to spend out of more tax efficient buckets instead. Note as well that distributions made as Qualified Charitable Distributions (QCDs) are still allowable and a prudent way to tax-efficiently make charitable contributions.

For those who have already made 2020 RMDs but who fall in the camp of not needing to have made them, there will be some provision to put those dollars back into the IRA or employer-sponsored plan (via what amounts to a rollover). There is still some uncertainty as to how this will work for everyone, as the bill included language about a 60-day period (that wouldn’t cover those who made RMDs in January), but it’s anticipated that future IRS guidance will clear that up. If not, it’s likely that such folks could pay back the RMD under the “Coronavirus-related distribution” portion of the Act discussed above. Note however, that beneficiaries of IRAs who have already made RMDs will not have the option of “undoing” that.

The last piece of the Act relating to RMDs is around “non-designated beneficiaries” of IRAs (typically including an estate, charity, or some trusts) subject to the “5-Year Rule”–meaning they must draw down the IRA balance over five years. These beneficiaries, assuming they are still somewhere in the midst of that five year period, do not have to make a distribution in 2020, effectively turning the 5-Year Rule into a 6-Year Rule.

Student Loans

The Act includes a few provisions related to student loan borrowers, including the suspension of required loan payments until September 30, 2020 and the ability for employers to pay back a portion of student loans on an employee’s behalf without the employee needing to include that repayment as taxable compensation. During the period of suspended loan payments additional interest will not accrue, but also note that the suspension is for required payments only. Voluntary payments may of course be made, but to the extent you want them stopped you will need to contact your loan provider to do so.

If you intend to apply for some sort of federal loan forgiveness program, note that the “clock” on those programs will keep running during this suspension of required payments. Thus it’s in your best economic self-interest to not make any payments during this time, as you will effectively be paying off a portion of our debt that would have otherwise been forgiven.

Unemployment Benefits

One of the major parts of the CARES Act is its temporary expansion of unemployment benefits. It expands the scope unemployment benefits to include self-employed individuals in the eligible population (through the Pandemic Unemployment Assistance provision). The Act also increases the time period over which individuals can claim unemployment benefits by making them immediately eligible on the front end (typically there is a one week waiting period before benefits start) and extending eligibility period a full quarter (13 weeks) on the back end. Lastly, the Act increases the amount of unemployment benefits available, allowing states to increase weekly benefits by up to $600.

Note that, unfortunately, states are woefully underequipped to deal with the unprecedented demand for unemployment benefits and so their systems are often slow and frustrating. Please let us know if you are running into any particular road blocks or have stumbled on to helpful tips as you navigate these systems.

Small Business Provisions

We’ve now come to the most complex (and still yet to be determined) portion of the CARES Act, which aims to help small businesses through the writing of low interest and potentially forgivable loans, a payroll tax credit, and the deferral of certain 2020 payroll taxes over the years 2021 and 2022. If you are a small business owner, please note that this is all still unfolding in real time as the logistics—especially of the loans under the Payroll Protection Program described below—get fleshed out. We have found that the good folks at Permanent Equity are putting out really high quality resources right now as they see their portfolio of family owned businesses go through this in real time, and I’d highly recommend you check out this page for a number of wonderful resources.

Payroll Protection Program. The first piece is called the Payroll Protection Program (PPP), which as I alluded to above consists of loans made through the Small Business Administration (SBA). The text of the Act states that the loans cap out at a 4% interest rate and with a maximum maturity of 10 years, but on Wednesday of this week the Treasury came out and said every loan is to have the same terms: a 0.50% interest rate and 2 year maturity.

To qualify for the PPP loans, businesses need to have less than 500 employees (with some exceptions for restaurant groups and other types of businesses), and should apply on a first come first served basis by June 30, 2020. This is already the source of some consternation, as many business owners are concerned that by the time their application (the details of which are still being fleshed out) is reviewed there won’t be any capital left to fund the loans, but there is some hope that the SBA will have access to additional capital if needed. Either way, the upshot of all this is small business owners should be hustling with their accountants to get documents together in preparation of a finalized application process.

The maximum loan amount is 2.5 times the previous year’s average monthly payroll, up to a maximum amount of $10 million. The proceeds of the loan may be used to fund basic business expenses like payroll, health insurance premiums, rent, and utilities, among others. As mentioned above, there is also the potential that some portion of this SBA loan would stand to be forgiven, if during the first 8 weeks after the loan was made its proceeds went primarily to cover basic fixed expenses like payroll, rent, utilities, etc. rather than capital improvements and other investments. The strong catch to all this is that the business must maintain the same number of employees within that 8-week period as it did over a choice between two previous periods. As you can see from that chart at the top of this post, I would imagine that catch will be pretty effective in keeping the amount of forgiven loans low.

Payroll Tax Credit. The Act creates a payroll tax credit called the “Employee Retention Credit For Employers Subject To Closure Due to COVID-19,” which is only available to small businesses who do NOT receive a loan via the PPP as described above. Businesses are eligible for this credit based on a more than 50% reduction in quarterly revenue (not profitability) year over year as a direct result of COVID-19 and associated mandated closures.

Payroll Tax Deferral. Businesses who have not had loans forgiven under the PPP above will be eligible to defer their payroll taxes through the end of the year ratably over 2021 and 2022. Note that this also includes self-employed individuals and the “employer equivalent” half of their self-employment taxes.

Miscellaneous Other Provisions

There are a number of other miscellaneous provisions that may or may not apply to you. I’ve included a few of them below.

$300 above the line charitable contribution. This may be the strangest of the bunch, yet one of the most likely to be used. Taxpayers who claim the standard deduction (and therefore do not get a tax benefit for any charitable contributions) will now be able to take a $300 “above-the-line” charitable deduction from their AGI. The amount is largely insignificant, but because very few people itemize deductions as a result of the 2018 tax law changes, the number of people taking this deduction will likely be enormous. Note however that the contributions must be made in cash, and cannot go to Donor Advised Funds or section 509(a)(3) “supporting organizations.”

AGI Limit for charitable deductions repealed for 2020. For those who do still itemize, there will be a temporary repeal of the AGI limit for charitable deductions. Previously limited to 50% of AGI (for cash contributions) and increased to 60% in 2018, there is no limit in 2020, meaning that people could conceivably reduce their tax burden to zero by making charitable contributions up to or in excess of AGI. Excess contributions can be carried forward five years, and as with the above-the-line $300 deduction, contributions must be made in cash and cannot go to Donor Advised Funds or supporting organizations.

Expanded definition of qualifying medical expenses. For the purposes of HSAs (and their predecessors the MSA) and healthcare FSAs, the definition of “qualifying medical expenses” was expanded to include over-the-counter medication and menstrual care products.

Other healthcare related items. There were a number of provisions related to Medicare included in the Act. These speak to the coverage by Medicare of a Coronavirus vaccine should one become available, the ability to extend prescription supply under Medicare Part D during the pandemic, and rules making it easier for “telehealth” appointments to be conducted and paid for.

NOLs loosened. Historically, net-operating losses (NOLs) generated in a given year by a corporation could be carried back two years and carried forward for twenty years. The 2018 tax law changes updated NOL rules such that they could not be carried back any more, but could be carried forward indefinitely, offsetting up to 80% of taxable income. The CARES Act has changed NOL rules again, basically opening up the opportunity to “carry back” again for the years 2018, 2019, and 2020, with the theory being corporations could apply losses to previously filed tax returns in order to gain some liquidity.

If you made it this far, I congratulate you! It was a lot. As I said above, please don’t hesitate to reach out to us if you have any questions. We would love to engage in a conversation around planning opportunities, likely with your tax preparer and/or accountant. These are challenging times, but I’m confident we can figure this stimulus package out and find a way through, together.

Until next time! Hang in there. Be in touch. Keep your eyes up.