When facing one of the most unprecedented events in our history, we need to approach the fight with every possible resource. One of those resources is social distancing, which has the unfortunate effect of impacting our economy and creating hardships for a large portion of our populace.
This road to flatten the curve of the spread of the virus is necessary, but the economic hardships and unemployment is also an issue that must be overcome. The Coronavirus Aid, Relief, and Economic Security (CARES) Act has been enacted to reduce some of that damage by increasing access to capital for individuals, small businesses, large businesses, and the hospital sector.
Retirement savers and small business owners have additional options available to them now, and the new programs may be able to help people avoid locking in substantial losses while supporting others, and to prevent atrophy of sectors.
Direct payouts safeguard individuals, and safeguard spending on others.
Our government needs and wants participation in these programs for anyone that they could be appropriate for. Some programs are appropriate for almost everyone!
Just because you aren’t showing symptoms of COVID-19, doesn’t mean you shouldn’t be socially distancing to decrease exposure, and just because you aren’t showing immediately symptoms of economic hardship, doesn’t mean that you won’t develop symptoms.
One way that the CARES Act will help the economy is through direct payments (termed “rebates”). These one-time payments may help people in the short term who are facing economic hardships and will provide additional capital for investing or spending with shuttered businesses once they’ve reopened.
The rebate amount will be based on the 2019 tax return (or 2018 if none was filed in 2019) and will be direct deposited into the taxpayer’s account with no additional action required.
The benefit will be $1,200 for individual filers whose income was up to $75,000 in 2019, $1,200 for Heads of Household (single parents for example) whose income was up to $112,500 in 2019, and $2,400 for married couples that filed a joint tax return whose income was up to $150,000 in 2019. There will also be up to $500 additional for each child under the age of 17.
For higher earners, that benefit will be decreased by $5 for each $100 earned past the threshold. For example, an individual who earned $80,000 has $5,000 of income beyond the threshold, which means the benefit decreases by $5 50 times. Thus, their benefit would be $950,
For most Americans – no additional action is required to participate. Additional action will be advantageous in two scenarios:
- If a taxpayer hasn’t filed a tax return in 2018 or 2019, the IRS will provide an online portal the taxpayer can fill out to initiate the process.
- If a taxpayer did not accept direct deposits in the past, the funds may take a significantly longer time to be processed and mailed. The Treasury Department is putting together an online portal where the direct deposit information can be entered to expedite that process.
Employer loans safeguard business, and safeguard employee paychecks.
Small business owners feel responsible for their employees, and though they have done everything in their power to keep them safe still many have not been able to keep everyone employed during this crisis. In order to help diminish the unemployment claims, the CARES Act has extended additional loan programs to employers with fewer than 500 employees. The Paycheck Protection Program (PPP) is centered around keeping employees employed and keeping their healthcare benefits active.
The PPP allows small business owners to take out loans for which up to 8 weeks of eligible expenses will be forgiven if the business owner does not reduce their payroll by over 25% for the specified time period. The loans are 100% guaranteed by the federal government, so no personal guarantee or collateral is needed to take them out. This can cover the entire payroll of employees (up to 100K annual salary per employee), healthcare costs, eligible utilities, and more up to a possible $10 million. The maximum amount of the loan will be based on 250% of the average monthly payroll costs during the 2019 year’s payroll and expenses for the same time period plus certain other expenses. Newer businesses that don’t have that history are eligible also, but the business did have to be started prior to February 15th to be eligible.
No principle or interest payments will be due for six months after taking out the loan.
Best of all – The amount and forgiveness on these loans can be retroactive to February 15th, so companies that have been forced to lay off employees could hire them back and have their payrolls be covered by this loan, and then have the loan forgiven later on.
It can take up to sixty days to get the loan application processed, so you should start right away if this is appropriate for your business. If you have other emergency loans already taken out, they can be converted in order to take advantage of the loan forgiveness, but you can’t have two different active emergency loan programs.
Retirement rule changes safeguard our retirement and help keep people invested.
Saving for retirement, and managing retirement income, is not a short-term job – it requires diligence and a long-term commitment into the future. A short-term crisis affects that long-term planning, and several rule changes have been created to help savers consider and weight additional options based on their situations. Here are some quick questions and answers about contributions and distributions from retirement accounts:
I held off on an IRA contribution just in case for 2019. Is it too late now?
The delaying of the federal tax payment and filing dates to July 15th was not just for tax payments, it was also for extending the deadlines for IRA and Roth IRA contributions. This applies to everyone, and if you haven’t had the funds to contribute to your plan because you’ve been keeping them in a savings account just in case, you can still make that contribution for the 2019 tax year.
I’m retired, but would hate to have to draw out funds right after the crash, do I have another option?
The Required Minimum Distribution (RMD) requirements have been waived for 2020. If you took your RMD distribution in January, you’ll likely be happy to have done so prior to the market crash. If you haven’t taken it yet, this waiver allows you to keep your money in the market and not be forced to lock-in the loss of the down market.
I need access to my retirement funds because of COVID, will I need to pay a penalty?
The funds are yours and available should you need them, and the CARES Act increases your accessibility to them without penalty. It not only increases the ability for standard loans to be taken out but has also introduced Coronavirus-related distributions (CRDs) with special rules applied to them.
A CRD makes it so that you can access those funds without incurring the 10% penalty if you are less than 59 ½ if you are:
- Diagnosed with SARS-CoV-2 or COVID-19
- Your spouse or dependent is diagnosed with such virus
- You experience adverse financial consequences as a result of being quarantined, furloughed, laid off, hours reduced, unable to work due to child car, business closing, or reduced hours.
Beyond immediate access and avoiding the 10% haircut, the distribution may be included in income (and taxes paid) over a three-year period. Re-contribution of the CRD is permitted over a three-year period to that plan or another eligible plan. That means there is an option to recontribute that amount within three years and have the funds once again be eligible for their tax preferred status without regard to retirement plan contribution limits.
What if I’m not eligible for a CRD, but I still need the money now?
The general advice about drawing on retirement funds for a loan is that should be a last resort, but there are times when it is appropriate.
The CARES Act has doubled the limits for the amount that could be borrowed from a retirement plan to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan for 180 days after the passage of the Act.
What else can we do?
We will continue to take all necessary precautions against COVID-19 to keep our customers, associates and communities safe. This struggle has shown us some of the best of humanity through the extraordinary efforts of first responders and charities. We can hope that the new infrastructure we’ve built and are building to respond to this crisis will be beneficial well beyond when the crisis is over.
Arvest will continue to monitor relief efforts and their impact on our customers, investors, and business owners. We are here to help you understand and have access to these new programs for you to support yourself and your family, but also for you to support your business, the community and the economy at large. Click here to contact a client advisor to learn more about these program and other relief efforts and find out how they may fit into your unique situation.
This content has been provided by Merrill Anderson and is intended to serve as a general guideline.
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