Coronavirus Relief Bill
The past few weeks have been difficult for all of us. It should go without saying that the round-the-clock effort provided by our medical professionals and others has been nothing short of heroic. However, because of the infectious nature and often serious symptoms of this novel coronavirus, the necessary efforts our country has undertaken to "bend the curve" has created far-reaching financial and economic ripple effects. To assist State and Local governments in helping to support their citizens in this time of need, on Friday March 27th the Federal government passed a Coronavirus Relief Bill. Below is a summary of six areas of the bill I felt were important to highlight for young professionals.
A Check from Uncle Sam (Recovery Rebates)
Likely the most publicized piece of the Coronavirus Relief bill is the section discussing a payment that most Americans will receive from the federal government in an attempt to help a large portion of the population sustain during these challenging times. It's important to note that this payment is essentially an advance payment of a refundable income tax credit the federal government will provide to those eligible when they file their 2020 income tax returns.
Who will Receive it:
The rebates will be dispersed based on each person's most recently filed tax return (2018 or 2019). One important item to note is that depending on income level in 2018 & 2019 relative to the income thresholds detailed below, a tax payer may want to delay filing their 2019 tax return (or hurry to file their 2019 return) to qualify as eligible for the rebate. (as always, every individual should check with their tax advisor for advice specific to their unique situation).
(Based on 2018 or 2019 AGI)
Status Rebate Income Threshold
Married (filing Joint) $2,400 $150,000
Head of Household $1,200 $112,500
All Other Filers $1,200 $75,000
Children under 17
The amounts above are increased by $500 per child under the age of 17
For every $100 the filer is over the applicable threshold (above), their payment will be reduced by $5.
Secretary of Treasury, Steven Mnuchin, has said repeatedly that the goal is to get this money into the hands of the American people as soon as possible. Mnuchin estimates it will take approximately three weeks from the time the bill passed to reach the majority of Americans. However, more conservative estimates anticipate eligible filers will likely receive their payments in early May.
In an attempt to expedite the process of sending rebates to those eligible, the Federal government is planning to provide payment via direct deposit for filers that have previously received their tax refund, or are currently receiving their social security benefits by direct deposit. The remaining rebates are expected to be sent via the traditional method of check by mail. For those who have moved since their last tax return was filed, or those whose bank account has changed, the IRS will be providing a phone number in the coming weeks to report such issues.
Relief for Student Loan Borrowers
The Coronavirus Relief bill has several sections aimed at providing relief to student-loan borrowers.
Federal Student Loan Payments Deferred until September 30, 2020
To add to the relief guidance that President Trump spoke about in previous weeks, the new bill extended the suspension of Federal student loan payments through September 30, 2020. During this time no interest will accrue on this debt. Unfortunately, though, while required payments are suspended, voluntary payments are not prohibited. And by default, payments will continue unless individuals take proactive measures to contact their loan provider and pause payments.
Also notable is that this period of time will continue to count towards any loan forgiveness programs. As such, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt (such as via the Public Service Loan Forgiveness program) should immediately pause payments. Because whereas other borrowers who continue to pay Federal student loans during this time may simply be paying down what is effectively 0% debt (at least temporarily), those borrowers who will ultimately have their outstanding student debt forgiven (upon completion of whatever requirements are necessary for their particular loan forgiveness program) are paying down a debt that would otherwise be wiped clean anyway!
Changes & Enhancements to Unemployment Benefits
The Coronavirus Relief bill also has a number of changes and enhancements to unemployment benefits in an attempt to provide relief and assistance to a large portion of the population that was previously ineligible to receive benefits.
Expansion of Unemployment Benefits
Self-employed individuals and others that are generally ineligible for 'regular' unemployment will be eligible for up to 39 weeks of benefits via this provision. Additionally, there is typically a one-week 'elimination period' before filers are eligible for unemployment benefits, however the new bill offers to pay States to provide unemployment compensation benefits immediately, without the "normal" one-week waiting period.
'Regular' Unemployment Compensation is Bumped by $600/ week
The new bill provides States with the ability to increase their unemployment benefits by up-to $600/ week with federally funded dollars for up to four months. This has the ability to dramatically increase the amount of money an individual is temporarily entitled to receive via unemployment compensation benefits.
Unemployment Compensation is Extended by 13-weeks
The bill also extends the maximum number of weeks an individual is eligible to receive unemployment compensation benefits (under state law) by an additional 13-weeks.
Required Minimum Distributions are Waved in 2020
Also, included in the bill is a provision that suspends Required Minimum Distributions (RMDs) during 2020. The relief provided by this provision is broad and applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and Governmental 457(b) plans. Furthermore, the relief applies to both retirement account owners, themselves, as well as to beneficiaries taking stretch distributions.
In one somewhat surprising twist, the new bill not only eliminates RMDs for 2020 but any RMD that otherwise needed to be taken in 2020. More specifically, individuals who turned 70 ½ in 2019, but did not take their first RMD in 2019 (and thus, would have normally been required to take such a distribution by April 1st, 2020, as well as a second RMD for 2020 by the end of 2020) do not have to take either their 2019 RMD or their 2020 RMD! Thus, these procrastinators get to escape two RMDs instead of just one!
2020 is Ignored for Purposes of 5-year Rule
A final item addressed by the bill's suspension of RMDs for 2020 is the way it impacts the 5-Year Rule that applies to Non-Designated Beneficiaries (e.g., charities, estates, non-See-Through Trusts) who inherit a retirement account from decedents who die prior to reaching their required beginning date.
In general, such beneficiaries must distribute the entirety of their inherited assets by the end of the fifth year after the retirement account owner’s death. The new bill, however, allows 2020 to be ignored, or simply not counted as one of those five years. Thus, for Non-Designated Beneficiaries subject to the 5-Year Rule who inherited from a decedent dying between 2015 – 2019, the 5-Year Rule is effectively a 6-Year Rule!
Small Business - Paycheck Protection & Forgivable Loans
The new relief bill also provides a number of provisions that are aimed at assisting small business owners. The Paycheck Protection Program is a (partially) forgivable loan program offered through the Small Business Administration (SBA). Such loans must be applied for by June 30, 2020, and can have a maximum maturity of 10 years. They may be provided via existing approved SBA lenders, as well as lenders who are otherwise certified by the SBA to offer such loans. Furthermore, such loans will be 100% guaranteed by the SBA.
Qualifying for the Paycheck Protection Program
Businesses, including sole-proprietors, that have fewer than 500 employees (including affiliated businesses), or the employee size standard under NAICS Code, if larger, are eligible for this relief (food service businesses also apply if they employ fewer than 500 people per physical location).
Under the Paycheck Protection Program, lenders will generally be able to issue 7(a) small business loans up to a maximum of the lessor of $10 million, or 2.5 times the average payroll costs over the previous year (excluding annual compensation of amounts over $100,000 per person). And the proceeds of such loans may be used to pay a variety of costs, including:
Group health insurance premiums and other healthcare costs
Salaries and/or commissions
Mortgage interest (excluding amounts pre-paid)
Other business interest incurred prior to February 15, 2020
Benefits of Loans Issued Under the Paycheck Protection Program
The single largest potential benefit of a loan issued under the Paycheck Protection Program is the possibility of having all or a portion of the loan forgiven. The amount eligible to be forgiven is the amount spent, during the first 8 weeks after the loan is made, on:
Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000;
Rent pursuant to a lease in force before February 15, 2020;
Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020; and
Group health insurance premiums and other healthcare costs.
If this sounds too good to be true, it won’t surprise you to learn that there is a catch. In order for the above amounts to be forgiven, the business must maintain the same number of employees (equivalents) from February 15, 2020 through June 30, 2020 as it did during either the same period in 2019 or from January 1, 2020 until February 15, 2020. To the extent this requirement is not met, the amount eligible for forgiveness will be reduced, ratably. Additional reductions in the amount to be forgiven will be incurred if employees with under $100,000 of compensation have their compensation cut by more than 25% as compared to the most recent quarter.
And as if this benefit wasn’t good enough, it actually gets even better! Any debt forgiven pursuant to this provision is not included in taxable income for the year.
Second, the maximum interest rate that can be charged for a loan made under this program is 4%. Small businesses tend to be risky borrowers, so the ability to borrow up to $10 million at no more than 4%, and over a term of up to 10 years, is a pretty significant ‘win’ for many small businesses in and of itself!
Finally, payments for loans made under the Paycheck Protection Program will be deferred for a period of no less than six months and no longer than one year. Additional guidance will be provided to lenders within 30 days of enactment to further elaborate on the 6-to-12-month deferment period.
Employer-Sponsored Retirement Plans & Coronavirus-Related Distributions
Enhancements to Loans From Employer-Sponsored Retirement Plans
Many employer-sponsored retirement plans, such as 401(k)s and 403(b)s, offer participants the option of taking a loan of a portion of their retirement assets. For individuals who have been impacted by the coronavirus (using the same definition as outlined below for Coronavirus-Related Distributions), the bill enhances the ‘regular’ plan loan rules in the following three ways:
Maximum Loan Amount is Increased to $100,000 – In general, the maximum amount that may be borrowed from an employer plan is $50,000. The new bill doubles this amount for affected individuals.
100% of the Vested Balance May Be Used – In general, once an individual has a vested plan balance that exceeds $20,000, they are only eligible to take a loan of up to 50% of that amount (up to the normal maximum of $50,000). The new bill amends this rule for affected individuals, allowing them to take a loan equal to their vested plan balance, dollar-for-dollar, up to the $100,000 maximum amount.
Delay of Payments – Any payments that would otherwise be owed on the plan loan from the date of enactment through the end of 2020 may be delayed for up to one year.
Mirroring similar relief that has been provided to individuals in Federally declared disaster areas in the past (for things like hurricanes, wildfires, and floods), the bill creates Coronavirus-Related Distributions. Coronavirus-Related Distributions are distributions of up to $100,000, made from IRAs, employer-sponsored retirement plans, or a combination of both, which are made in 2020 by an individual who has been impacted by the Coronavirus because they:
Have been diagnosed with COVID-19;
Have a spouse or dependent who has been diagnosed with COVID-19;
Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
Are unable to work because they lack childcare as a result of the disease;
Own a business that has closed or operate under reduced hours because of the disease; or
Meet some other reason that the IRS decides to say is OK.
Given the laundry list of potential individuals who may qualify for relief under this provision, it seems rather clear that Congressional intent was to make this provision broadly available. The IRS will likely operate in kind, and take a liberal view of who has been impacted by the Coronavirus enough to qualify for a Coronavirus-Related Distribution.
There are a number of potential tax benefits associated with Coronavirus-Related Distributions. More specifically, these include:
Exempt From the 10% Penalty – Individuals under the age of 59 ½ may access retirement funds without the normal penalty that would otherwise apply.
Not Subject to Mandatory Withholding Requirements – Typically, eligible rollover distributions from employer-sponsored retirement plans are subject to mandatory Federal withholding of at least 20%. Coronavirus-Related Distributions, however, are exempt from this requirement. Plans can rely on a participant’s self-certification that they meet the requirements of a Coronavirus-Related Distribution when processing a distribution without mandatory withholding.
Eligible to be Repaid Over 3 Years– Beginning on the day after an individual receives a Coronavirus-Related Distribution, they have up to three years to roll all or any portion of the distribution back into a retirement account. Furthermore, such repayment can be made via a single rollover, or multiple partial rollovers made during the three-year period. Finally, if distributions are rolled using this option, an amended return can (and should) be filed to claim a refund of any tax paid attributable to the rolled over amount.
Income May Be Spread Over 3 Years – By default, the income from a Coronavirus-Related Distribution is split evenly over 2020, 2021, and 2022. A taxpayer can, however, elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income.
The information contained in the summaries above is from a blog entry written by Jeffrey Levine, CFP® discussing various items included in the CARES act. For anyone interested in reading the article in its entirety, it is available to read in full on Michael Kitces' Nerds Eye View blog here. As always, each person should consult their financial planner and/or tax advisor regarding their specific situation to determine how the provisions in the Coronavirus Relief bill may or may not effect them.
Disclaimer: This article is provided for general information and illustration purposes only. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. Nothing contained in the material constitutes tax or legal advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation.