March 27, 2020
CARES Act 2020: FAQ on Retirement Planning
The CARES Act has been passed and it provides protections and funding for a number of initiatives aimed at reducing the impact of COVID-19 on the American economy. The Act provides assistance to workers and a variety of businesses that are affected by the outbreak. Below is a list of questions about the bill and what provisions have been included that focus on retirement planning.
Relief for Retirees
Q: Do I still need to take a distribution from my retirement accounts to meet the RMD requirement?
A: Required Minimum Distributions from qualified plans and IRAs have been suspended for 2020 and are set to resume in 2021. Also, if you have not taken your RMDs for 2019 and were planning on doing so prior to April 1st, that distribution is also no longer required. The Act also appears to apply to individuals required to take a distribution from inherited IRAs.
Q: Will individuals receive direct payments from the federal government?
A: The bill does provide for payments directly to individuals and families. Individuals will receive a one-time payment of $1,200 and married couples are set to get $2,400. In addition, families would see an additional $500 per child under the age of 17.
There is an income limit that determines who will receive checks. Individuals with adjusted gross incomes of more than $75,000 would see a reduction in the payment amount and those who make more than $99,000 would not qualify for payments. These thresholds are doubled for married couples with $150,000 being the point where payments would be reduced and payments would be eliminated for those making above $198,000 in adjusted gross income. In many cases, the income threshold will be based on your most recent tax filing, which for many is 2018.
Q: Has the IRS extended the filing deadline for 2020?
A: Although not directly a part of the CARES Act, the IRS has sent a notification to taxpayers that the filing deadline for 2019 has been extended from April 15, 2020, to July 15, 2020.
Q: Does the extended filing deadline allow me to make IRA contributions for 2019 beyond the original filing deadline of April 15, 2020?
A: You now have until July 15, 2020, to make IRA contributions that will count for 2019.
Q: Has the tax treatment of charitable contributions to qualified charities changed under the new law?
A: Prior to the legislation, in order to get a deduction for charitable contributions you needed to itemize your deductions on your return. The new law has added the ability to deduct up to $300 in donations to a qualified charity even if you use the standard deduction.
For those that itemize their deductions, the law removes the limits on giving that were set at 60% of adjusted gross income. Charitable contributions under the new legislation can now be deducted up to 100% of adjusted gross income.
This change is also reflected in rules for businesses as they are now able to deduct their charitable contributions up to 25% of income as opposed to 10% before the CARES Act.
Relief for Workers
Q: If I am younger than 59.5, can I access the money in my retirement accounts during this time?
A: The CARES Act makes it possible to make a withdrawal from retirement accounts up to $100,000 penalty-free if you meet certain conditions.
- You or your spouse is diagnosed with the disease OR
- You have experienced financial hardship as the result of unemployment, furlough, having work hours reduced or are unable to work due to a lack of availability of child care.
Typically, if you withdraw money prior to 59.5 you are subject to a 10% penalty on the amount withdrawn. While the CARES Act does waive this penalty, those that withdraw funds are still subject to income tax on the withdrawal. To lessen the hardship, the tax due on the withdrawal is allowed to be spread over three years beginning in 2020. You can also avoid the income tax altogether by paying back any amount withdrawn within the three-year time period.
Q: Can I borrow money from my 401(k) or another qualified plan?
A: If your 401(k) or qualified plan has borrowing provisions, you may access the money from these plans in the form of a loan. Prior to the bill, the limit for borrowing was set at $50,000. Under the CARES Act, that limit has been increased to $100,000.
In addition to the borrowing limit increase, prior to the act you could only access a maximum of 50% of your available balance. That has now been increased through the act to allow you to borrow up to 100% of the value of your account. Loan repayment provisions have changed as well. Before, you had a five-year time frame to pay back the loan. Now, that five-year window does not begin until one year from the date of the loan.
Q: Am I required to continue my payments for federal student loans?
A: As part of the bill, the Department of Education will be suspending payment requirements without penalty through September 30, 2020. This a further extension of the earlier announced provision that allowed borrowers to suspend payments for 60 days.
Q: What changes have been made to unemployment benefits for individuals?
A: The CARES Act provides unprecedented expansion of unemployment benefits that are typically administered by states. The federal protection would increase the state benefit which is typically between $200 to $550 per week by an additional $600 per week.
In addition to increasing the amount of the benefit, the amount of time that an employee is eligible for benefits is being increased. State unemployment benefits typically provide benefits between 12 and 28 weeks depending on the state. The CARES Act would expand this time period by 13 weeks.
Unemployment benefits are also being extended to include those that are self-employed and independent contractors which historically have not been eligible in many states.
Relief for Small Business Owners
Q: Is there any help or assistance in the bill for Small Business Owners?
A: For purposes of the bill, a small business is defined by a business with less than 500 employees and includes sole proprietors and non-profits. The CARES Act made available $350 billion in loans. The loans are intended to cover payroll expenses, as well as certain business overhead costs like rent or utilities. The loans have a maximum interest rate of 4% and are to be paid over 10 years. In certain cases, these loans can be forgiven if the business successfully maintains its workforce. In order to seek forgiveness of the loan, the borrower must complete an application and include documentation on how the money was used.
For capital that is needed beyond payroll cost, the federal government, through the Small Business Administration, is expanding access to Disaster Loans and Grants. The grants are in the amount of $10,000 and do not need to be repaid. Loan amounts below $200,000 under this program will not require a personal guarantee of the business owner.
Relief for Larger Businesses
Q: Does the act provide any provisions to address the needs of larger businesses?
A: The Treasury Department has been authorized to make up to $500 billion in loans, loan guarantees, and investments. It specifically includes $25 billion for passenger airlines and $4 billion for cargo airlines. It also provides $17 billion for businesses that work in national security. The remainder of the funds, or about $454 billion, can be distributed among other businesses, states, and municipalities based on need.
There are restrictions on businesses who receive the loans as it relates to paying dividends to investors and how the money is to be used. There are limits on executive compensation and stock buybacks. Businesses are expected to use the money to cover payroll and overhead costs. The program will be reviewed by a congressional oversight committee to ensure compliance.
Q: What additional funding is being provided for hospitals and other medical facilities?
A: The bill authorized around $117 billion for hospitals to deal with the outbreak. It also provides $100 billion for funding of a public health and social emergency fund to reimburse providers for expenses and lost revenues. Of that, $65 billion will go to hospitals and the remainder will be provided to medical providers and suppliers.
The bill also provides increases in reimbursements for those facilities that treat Medicare and Medicaid patients.