These past few weeks have been a whirlwind of activity! It’s hard to keep up on the news, but one of the most significant pieces of legislation in our time may be the CARES Act or Coronavirus Aid, Relief and Economic Security Act. The bill passed on March 27th, allocating $2.2 trillion dollars in aid to address the economic fallout due to the COVID-19 pandemic. This is the largest economic relief bill in US history. Key elements of the CARES Act include:
$532 billion for large businesses and local governments
$377 billion for small businesses
Estimated to total $300 billion in direct payments to families in the form of $1,200 checks ($2,400 for couples) plus $500 per child to individuals earning $75,000 or less ($150,000 for couples)
$260 billion in expanded unemployment benefits
$150 billion in direct aid for states and municipalities
$125 billion for hospitals and other health care providersTo help sort through the mountain of information on the CARES Act, we highlighted some of the retirement and financial planning components that might be useful to you or your loved ones.
2020 RMDs Waived
Similar to the Great Recession in 2008, retirees are allowed to forgo or waive their Required Minimum Distribution (RMD) for the 2020 year from IRA, 401(k), 403(b), 457(b) and Inherited IRA accounts. The RMD distribution amount is based on the value of the retirement account at December 31st of the previous year. Given investment accounts have declined in 2020, the amount of the RMD as a percentage of the current account balance would now be larger than anticipated. Taking an RMD when the account value is down also forces the investor to “lock in losses” by selling equities when they are valued lower. This new provision to waive RMDs will allow retirees to keep the funds invested and hopefully regain value as the market recovers.
If you’ve already taken your 2020 RMD, you are allowed to write a check and reverse the distribution within 60 days. If tax withholdings were taken from your RMD, you’ll need to refund your retirement account with the net balance you received, plus the tax withholding that was sent to the IRS to qualify as a full reversal. You’ll be refunded the initial IRS tax withholding when you file your 2020 taxes. If you refund your retirement account with the net of tax balance only, the IRS taxes withheld will be assessed to you as income for the 2020 year.
Unfortunately, completed 2020 RMDs for Inherited IRAs are not allowed to be reversed, no matter how many days have passed since the distribution. Since this is a unique new rule and there are lots of exceptions and exclusions, you may want the assistance of a financial advisor with this transaction.
Retirement Plan Loans
Under the CARES Act, affected individuals may withdraw money out of their IRA or company retirement plan to offset expenses resulting from the COVID-19 pandemic. The 10% early withdrawal penalty for those under age 59 ½ is waived. Additionally, the 20% Federal tax withholding from company sponsored retirement plan (i.e.: 401k) distributions is also waived. To fully avoid taxation on the COVID-19 distribution, the recipient can repay the funds into their retirement account over a three year window. If the individual does not plan to repay, taxation on the distributions can be split evenly over 2020, 2021 and 2022 to help ease the tax burden. However, if your income will be significantly lower in 2020, and you prefer to pay the tax on a retirement account distribution all in the current year while your tax bracket is lower, that is also allowed.
SBA Paycheck Protection Programs
In an effort to flatten the curve, many businesses have been forced to close doors and comply with the Safer at Home mandate. As a result, businesses large and small, are struggling to keep employees on payroll and cover unforgiving overhead expenses like rent and utilities. The Paycheck Protection Program (PPP) is a Small Business Association (SBA) loan program designed to help address these needs.
On April 3rd, SBA opened the application process to small business owners and sole proprietors. On April 10th, independent contractors and self-employed individuals were also allowed to apply. Small and medium-sized businesses are defined as companies with 500 or fewer employees, including sole proprietors, self-employed individuals and independent contractors. 501(c)(3) non-profits also qualify.
Approximately 11,000 authorized US lending institutions including banks, credit unions and Fintech lenders are accepting the applications for loans. It is recommended that you reach out to your existing business banking relationship to inquire of a loan for more efficient processing. The application is short, but requires 2019 payroll supporting documentation and 2019 IRS Quarterly Payroll Tax Reports (forms 940, 941 or 944 as applicable). Therefore if you plan to apply for a loan, reach out to your CPA and payroll provider early to gather the necessary information.
Federal guidance indicated that in eight weeks, if businesses have spent the entire loan amount on qualified business expenses, the loan converts to a grant.
A great resource for organizing your financial data in preparation of the loan process is the AICPA PPP payroll calculator, available for free online.
These are difficult times, but I believe challenge allows us to demonstrate grace and humanity in a way we worried was lost. I am reminded daily how much I have to be grateful for. We will make it through this together; better, stronger and more united than we began. I want to give back the kindness and support bestowed upon me. If we can help be a conduit of information or a financial sounding board in a volatile stock market, please let us know. We want to help.
Sources:
- Buckingham Strategic Partners CARES for Retirement Accounts FAQs
- AICPA SBA Paycheck Protection Program resources for CPAs