The following is a synopsis of the major provisions of the legislation likely to impact our clients and the communities in which we serve.
Relief for Individuals
Direct Cash Payments:
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, a $2 trillion economic stimulus package, was signed into law by President Trump on March 27, 2020. The CARES Act is expansive and provides much needed economic relief to most Americans, especially those impacted directly and indirectly by the coronavirus. The following is a synopsis of the major provisions of the legislation likely to impact our clients and the communities in which we serve.
Under the CARES Act, Congress relaxed three key retirement account rules, temporarily granting individuals greater access to their tax-deferred accounts and relaxing distribution requirements.
- Eligible individuals are permitted to take coronavirus-related distributions of up to $100,000 from tax deferred retirement accounts in 2020.
- Eligible individuals include the following:
- Individuals diagnosed with COVID-19, including spouses and dependents.
- Those experiencing financial hardship as a result of COVID-19.
- Taxpayers are still liable for the income tax on amounts withdrawn.
- Taxes can be paid over three years from the date of distribution, or a contribution of an amount equal to the original withdrawal must be made within three years.
- For individuals under age 591⁄2, withdrawals are exempt from the 10% penalty that normally applies.
- Eligible individuals include the following:
- Eligible individuals are permitted to use up to 100,000 maximum for 100% of their vested account balance, whichever is less, as a loan against their employer sponsored retirement accounts. This amount is doubled for 2020 compared to the $50,000 maximum or 50% of their vested account balance. Check with your employer to determine if loans are permitted from your retirement account within your organization’s retirement plan.
- Required minimum distribution (RMD) rules are waived for 2020. Prior to the passage of the CARES Act, individuals who turned age 72 in 2020 were required to take mandatory distributions from their tax deferred retirement accounts. The waived RMD rule for 2020 is extended to inherited IRAs as well.
Despite the additional access to retirement accounts, it is extremely important that individuals consider the potential impact of utilizing their retirement assets today. The long-term ramifications are significant.
Beginning in 2020 and for future tax years, the CARES Act permits a permanent $300 above-the-line charitable contribution deduction for taxpayers that typically claim the standard deduction. For taxpayers that itemize their deductions, the CARES Act removes the limitation on the charitable contribution deduction (50% of adjusted gross income). The limitation for 2020 is effectively 100% of adjusted gross income. To the extent that eligible charitable contributions are in excess of 100% of a taxpayer’s adjusted gross income in 2020, they may be carried forward to future tax years.
Since the new law is only a few days old, the IRS will be busy issuing further guidance on this issue over the course of 2020. It is important to review your situation with your tax preparer as the CARES Act may present you with new tax planning opportunities.
Expansion of Unemployment Benefits:
Unemployment benefits are significantly expanded under the CARES Act. Individuals laid off due to the coronavirus will receive an additional $600 per week on top of what they receive from their respective state. The national average is about $340 per week, and under the new federal program that will increase to $940. The additional $600 payment is available for up to four months.
The legislation extends the unemployment insurance benefit for an additional 13 weeks. People nearing the end of the allowed benefit period would qualify for an immediate extension as well.
The CARES Act also establishes a new and temporary Pandemic Unemployment Assistance program through the end of 2020. The program is designed to help individuals that typically do not qualify for unemployment insurance benefits (the self-employed, freelancers, contractors, etc.) to gain access to them.
Relief for Employers
The CARES Act provides multiple options for employers seeking financial relief during the coronavirus pandemic.
Paycheck Protection Program:
$349 billion in benefits are available to eligible small businesses that retain their workforce. Eligible small businesses can apply for a loan to help offset payroll related costs incurred between February 15th and June 30th of 2020. The maximum loan to a small business cannot exceed $10 million, the maximum term is 10 years, and the maximum interest that lenders may charge is four percent. The loans are 100% guaranteed by the Small Business Administration. Loan forgiveness is also available under certain circumstances. The program is modeled after the Small Business Administration’s (SBA) 7(A) Loan Guaranty Program. Small businesses should consult with their banker and CPA for additional details.
Business Tax Benefits:
Eligible organizations that do not pursue the Paycheck Protection Program may be eligible for a fully refundable employee retention tax credit. The credit is equal to 50% of the employer’s applicable share of payroll taxes on wages up to $10,000 per employee. To be eligible, businesses must demonstrate that operations were suspended due to an official government order related to the coronavirus, or gross receipts declined by at least 50% compared to the same quarter in 2019.
The CARES Act also provides employers who do not seek loan forgiveness with a temporary payroll tax holiday. The specific provision of the law gives companies the option to defer payment of the employer share of Social Security taxes for the period of March 27, 2020 through December 31, 2020. Half of the deferred amounts are due by December 31, 2021, with the remaining balance due by December 31, 2022.
Retirement Plan Funding & Administration Relief:
The CARES Act retirement-related provisions allow organizations that have single-employer pension plans to delay the due date for any contribution due in 2020 until January 1, 2021.
Plan sponsors of defined contribution retirement plans are provided relief in amending their plan document for hardship distributions and participant loan provisions related to the coronavirus. Typically, the plan sponsor will amend the plan document before any new plan provisions are enacted, but under the CARES Act, the plan sponsor may amend the plan document retroactively for the new coronavirus hardship distribution and loan provisions on or before the last day of the first plan year beginning on or after January 1, 2022.
Economic Stabilization for Distressed Industries
Under the new law, $500 billion in lending is available to the following industries:
- Passenger Airlines - $25 billion
- Cargo Airlines - $4 billion
- Businesses Critical to Maintaining National Security - $17 billion
- Loans and Investments to Provide Liquidity to Businesses, States, or Municipalities - $454 billion
- Extension of Tax Filing and Tax Payment Due Dates
Extension of Tax Filing and Tax Payment Due Dates
In the coming days and weeks, government agencies will release logistical guidance on how best to proceed with seeking relief through the provisions of the CARES Act. We encourage individuals and organizations to reach out to their CPAs, attorneys, and bankers to determine the appropriate path forward. As always, please contact us at Alesco Advisors if we can be of assistance.