What You Need to Know About the $2 Trillion CARES Act

The Coronavirus Aid, Relief and Economic Security Act (CARES) creates approximately $2 trillion in relief funding, liquidity, tax breaks and loans for individuals and businesses that have been affected by the COVID-19 virus. As one of the largest spending bills in history, CARES is focused on assisting with the vast liquidity crunch that millions of American workers and businesses are facing due to the sudden economic slowdown associated with this pandemic. With most recent unemployment claims reaching over 6.6 million, this is a critical time for workers and businesses alike.

Recovery rebates for individuals
To help individuals and families during this time, the government will send up to $1,200 to individual taxpayers and $2,400 for married couples filing joint returns. An additional $500 payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit). Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint).

All recipients who are under the phaseout threshold will receive the same amounts. Rebates will be paid out in the form of checks or direct deposits and the IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099.

Unemployment Benefits
The CARES Act also created the Federal Pandemic Unemployment Compensation program which is designed to provide an additional $600 a week in unemployment compensation for up to four months. This would be in addition to state provided unemployment benefits. The program also provides the possibility of 13 additional weeks of unemployment benefits through December 31, 2020 to assist those who are seeking work but remain unemployed after state unemployment benefits have ended.

Medical Leave Benefits
The CARES Act also has provisions that require most employers to provide employees paid employee sick or medical leave benefits. Keep in mind, these benefits vary depending on the size and type of organization. The CARES Act provides 2 weeks or up to 80 hours of paid sick leave at the employee’s regular rate if they can’t work because they are quarantined, have symptoms or have been diagnosed with COVID-19. Additionally, an employee that is unable to work because they need to care for an individual subject to quarantine or a child whose school or child care provider is closed, can receive two weeks of paid sick leave at two-thirds the employee’s regular rate of pay. Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds pay may be available for those that are unable to work due to caring for a child whose school or child care provider is closed.

Healthcare Provisions

Medicare and all private insurance plans are required to cover COVID-19 related tests, treatments and possible vaccines. Additionally, qualified medical expenses from HSAs were expanded to include medical equipment needed in quarantine and/or social distancing. While additional provisions allowing for the unemployed to continued COBRA for health coverage, the Affordable Care Act might allow for additional subsidies, ultimately reducing healthcare costs for those unemployed. Visit Healthcare.gov for more information.

Waiver of 10% early distribution penalty.
Typically, distributions from traditional IRAs and 401(k)s prior to age 59 ½ will result in a 10% early withdrawal penalty. The CARES act waives this penalty for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected or who is economically harmed by the COVID-19 (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. For tax purposes, income arising from the distributions is spread out over three years unless the employee elects not to spread out the income.

Waiver of RMDs
Required minimum distributions (RMDs) from retirement accounts that otherwise would have to be made in 2020 are waived. This would also apply to RMD distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

Student Loans
The CARES Act allows individuals with student loan debt to stop paying federal student loans from now through September 30, 2020. During this time, interest on federal loans will be set to 0% so no additional interest will accrue. Additionally, if your employer pays student loans as an employee benefit, the CARES Act allows them to pay up to $5,250 of your loans tax-free this year.

Paycheck Protection Program (PPP) for Businesses
Directed at small businesses with less than 500 employees that have been affected, the PPP authorizes up to $349 billion toward job retention and other business expenses. Businesses with greater than 500 employees may still qualify if they meet certain SBA size standards. Small businesses and eligible nonprofit organizations, Veterans organizations, and Tribal businesses described in the Small Business Act, as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards.

Eligible recipients may qualify for a loan up to $10 million determined by 8 weeks of prior average payroll plus an additional 25% of that amount. Loan payments will be deferred for six months and have a maturity of 2 years with an interest rate of .5%. According to the SBA, the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities. Due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll. No collateral or personal guarantees are required and neither the government nor lenders will charge small businesses any fees.

Business Tax benefits
If your business had or will have net operating losses from 2018, 2019 or 2020, losses can be carried back for five years and can fully offset taxable income.
Additionally, employer-side payroll taxes, FICA and half of SECA, are delayed until December 31, 2021, with 50% due then and the remainder due by December 31, 2022. This may help provide some short-term cash flow relief for the next two years.

The CARES Act also provides for a Retention Credit which is a refundable payroll tax credit for 50 percent of wages paid to employees during this crisis. The Credit may be available if operations were fully or partially suspended due to a COVID-19 shutdown order or if gross receipts declined by more than 50 percent that same quarter.

The credit is for the first $10,000 of compensation paid to an employee, from March 12 to December 31, 2020, resulting in what may be a sizable tax credit for businesses that kept their employees during the economic slowdown.

As noted above, the CARES Act can have significant impacts on individuals, families and businesses. As is the case with all government programs, it is important to review the details to determine which programs may apply to you. Keep in mind, this is for informational purposes and is not intended to be ERISA, tax, legal or investment advice. Since everyone’s situation is unique, consider speaking to your tax and financial adviser to determine the most appropriate approach for you.

Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.