Last Friday, President Trump signed into law a massive piece of legislation, titled the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The law provides over $2 trillion (yes, trillion) of funding to everything from the health sector, state and local governments, large and small businesses, and of course, individuals and families.

Most clients of mine and readers of this blog are likely to be most impacted by the funds going to individuals, families, and small businesses. Below is an overview of these items. In the coming weeks, I’ll provide a follow-up article with some ideas on how to make some smart financial planning decisions around these new rules and benefits.

How the CARES Act Benefits Individuals and Families

The most anticipated benefit of the law is the check most Americans will be receiving, but the law impacts many other things including retirement account distributions, 401(k) loans, charitable contributions, HSA/FSA plans, and unemployment benefits.

“Your check is in the mail...eventually!” How the Recovery Rebates Work

The great news is most Americans (probably 90% or so) will receive at least some money from Uncle Sam. This amounts to a one-time payment of up to $2,400 to married filing jointly, and $1,200 for single filers. Families with children under age 17 will receive an additional $500 per child.

The Recovery Rebate phases out based on your adjusted gross income (AGI). The phase out begins for married filing jointly at $150,000, and $75,000 for single filers. As your AGI exceeds these amounts, the total amount of your Recovery Rebate begins to decrease. More than likely, those married taxpayers filing jointly will fully phase out (meaning no benefit received) around $198,000, and single filers will phase out around $99,000.

The rebate amount is based on your 2018 or 2019 taxes, whichever have been filed most recently. The rebate should be viewed as a prepaid tax credit, payable in 2020 (if eligible), but “trued up” when you file your 2020 taxes in 2021. The rebate being based on your most recent tax filing is important to keep in mind, because your 2019 situation may look very different from 2018. In my case for example, my wife and I brought a new baby into our family in 2019. If my 2019 taxes weren’t filed soon enough, we could miss out on an extra $500 credit. This same rule may apply to kids leaving the house, kids turning 17, or in cases like a divorce where your household income situation may change significantly.

Rebate checks will come...but it will take some time. More than likely, checks won’t arrive in the mail (or electronically if the IRS has your checking account info on file) until probably May, if not later.

Eligible IRA Distributions Significantly Increase

For those individuals and families legitimately impacted by COVID-19, the new law allows up to $100,000 to be withdrawn from IRA and employer-sponsored retirement plans, without the typical 10% penalty. The list of adverse COVID-19 circumstances which could permit this type of distribution include:

Have been diagnosed with COVID-19;
Have a spouse or dependent who has been diagnosed with COVID-19;
Experienced 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 you lack childcare as a result of the disease;
Own a business that has closed or operate under reduced hours because of the disease

As you can see, there are likely people that could qualify for this special distribution. The distribution must happen in 2020 and is eligible to be received over three years (2020, 2021, and 2022) or it can all be counted as taxable income within one year. Those taking the distribution can also pay the funds back into their retirement plan over three years, if they so choose.

Unemployment Benefits Increase and the Self-Employed are Now Eligible

Unemployment benefits are run by the states, but the new law provides additional funding to increase unemployment payments. These payments can be increased by up to $600 per week thanks to the new funding. To put that in perspective, the national average unemployment benefit is $400 per week, translating to a 150% increase!

Perhaps even more significant, unemployment benefits are now extended to the self-employed as well for up to 39 weeks.

Other Benefits: 401(k) Loans, Charitable Giving, Student Loans and HSAs

The CARES Act comes with a slew of additional benefits. 401(k) loans are available up to $100,000 (up from $50,000), and 100% of the vested balance can be borrowed. Payments required to pay back the loan may be delayed for up to one year.

There is also an above-the-line tax deduction for up to $300 paid to qualified charities. It’s not much, but it’s something. Payments must be made in cash (not securities).

Student loan payments can be deferred until September 30, 2020, during which time no interest will accrue. Voluntary payments toward student debt will be prohibited during this time (oddly), so those with student loans will want to go online and pause payments, since many are likely on auto pay currently.

HSAs and FSAs can now be used for over-the-counter medications as well, a provision that was previously not allowed.

How the CARES Act Benefits Small Businesses

We all know that small businesses largely fuel the U.S. economy. To respond to this fact, and to provide small businesses with capital that will be desperately needed in the coming months, the CARES Act provides significant funding through a variety of measures.

Loans (and Loan Forgiveness) Through the Paycheck Protection Program

The Paycheck Protection Program will provide loans to small businesses with less than 500 employees. These loans can be up to the lesser of $10 million or 2.5 times monthly payroll. The maximum loan maturity is 10 years, and all loans are guaranteed by the Small Business Administration. The barrier to entry for these loans is very low, as all that is required (besides the above) is a good faith certification that the loan is needed due to the economic conditions caused by COVID-19. The maximum interest rate that can be charged on these loans is just 4% and loan payments are deferred for up to one year, an incredible deal seeing how potentially risky many small business ventures are.

The borrowed funds can be used to cover payroll costs, health insurance premiums, salaries and commissions, rent, mortgage interest, and utilities.

Perhaps the biggest feature is that some or all of these loans can be completely forgiven. The forgiven portion is the amount used in the first eight weeks following funding, assuming the funds are used to cover:

Payroll costs (excluding prorated compensation for individuals earning over $100,000)
Rent
Electricity, gas, water, transportation, telephone and internet

Forgiven costs must have begun by February 15, 2020.

This portion of the stimulus is largely in place to encourage employers to keep existing employers on their payroll. As a result, qualifying for full or partial loan forgiveness requires employers to maintain the same number of employees from February 15, 2020 through June 30, 2020 as the employer had in either the same period during 2019, or from January 1, 2020 through February 15, 2020. Any employees rehired by June 30, 2020 would help qualify a small business as well. A small business with shrunken payroll isn’t immediately disqualified from the loan program, but the forgivable portion of the loan is decreased.

Payroll Tax Deferral

For those small businesses not receiving loan forgiveness through the Paycheck Protection Program, there is a payroll tax deferral benefit available. This allows for payroll taxes owed now through the end of 2020 to be deferred. 50% of the deferred amount will be owed by December 31, 2021, and the other 50% will be owed by December 31, 2022. This provision applies to self-employed persons as well, but for the “employer” portion only.

Hard times on the horizon. Individuals, families and small businesses will be tested in their ability to keep operating, even with traffic to certain businesses literally dropping to zero. The benefits of the CARES Act can certainly help bolster family and business balance sheets and cash flows, providing at least a temporary lifeline while navigating troubled waters.