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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law last Friday, March 27, 2020.
If you are concerned that you will be strapped for cash or will not have enough in your emergency fund to cover expenses in the next few months due to the financial impact of the novel coronavirus (COVID-19), direct checks (to qualified individuals) and the ability to pull out penalty free retirement distributions may be your savior. As for business owners, there are two main ways your business can get needed cash: the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP). Click here for a link to the full text of the bill.
What does this means for you, your family, and business owners across the country? Below are some of the highlights of the bill that may be beneficial to your financial situation.
INDIVIDUALS
Direct payments (no sign-up needed)
According to the IRS, economic impact payments will start in the next few weeks either directly in their bank accounts (if previously linked last tax filing), or by direct mail. Tax paying Americans who meet the criteria will receive a one-time direct deposit of up to $1,200, and married couples will receive $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples. Visit IRS website for any future update.
Retirement Accounts
Below is a description of the key CARES Act provisions for retirement plan participants. Coronavirus-Related Distributions Plans may permit in-service coronavirus-related retirement distributions from a participant’s vested account balance without regard to the normal withdrawal restrictions. As all retirement plan administrators and plan sponsors are putting together necessary forms to assist with this change, it would be best to check with your company’s retirement plan Third Party Administrator (TPA) if your HR has no information yet. This relief is offered through December 31, 2020.
Coronavirus-related distributions are available to “eligible” participants who:
Are diagnosed with a coronavirus (COVID-19 or SARS-CoV-2) illness.
Have a spouse or dependent diagnosed with a coronavirus illness.
Experience “adverse financial consequences” as a result of a quarantine, furlough, lay-off, reduction in work hours, business closure, the lack of childcare, or other factors determined by the IRS due to the coronavirus emergency.
Retirement distributions are subject to the following requirements:
Limited to $100,000 per tax year, aggregated across all plans of the employer or controlled group.
Not subject to 20% mandatory tax withholding upon distribution.
Exempt from 10% early withdrawal penalty generally applicable to distributions made to participants who are 59-1/2 or younger.
Eligible to be indirectly rolled into an IRA or employer plan within 3 years from the date the distribution is taken.
Amounts not indirectly rolled into an IRA or employer plan are included in gross taxable income, over 3 tax years (beginning with the tax year of the distribution), unless the participant elects to include all amounts in a single tax year.
Coronavirus-Related Loan Relief – Two types of loan relief were also provided:
Plans may allow eligible participants, to take loans up to the lesser of $100,000 or 100% of the participant’s vested account balance for the specified period.
Upon the request of an eligible participant, plan sponsors must suspend loan repayments due on outstanding loans that are in good order for a period of up to 12 months. This relief expires on December 31, 2020. The suspension period is to be added to the original loan term when repayments, including accrued interest, resume, regardless of the length of the loan’s original term.
Waiver of 2020 Required Minimum Distributions (RMDs)
Qualified 401(a)/(k), 403(b), and governmental 457(b) plans will not be required to make any RMD payments for 2020.
Participants who turned age 70½ prior to 2019 will not be required to receive an ongoing RMD for 2020.
Participants who turned age 70½ in 2019 and who did not receive their first RMD for 2019 on or before January 1, 2020 will not have to receive their first (2019) RMD or their 2020 RMD.
Beneficiaries receiving life expectancy payments will not be required to receive their 2020 beneficiary RMD.
Beneficiaries who have an account balance in the plan subject to the five-year distribution rule may extend their required distribution by one year (full distribution of the account must be made by the 6th anniversary of the participant’s death).
BUSINESSES
For Business Owners: Economic Injury Disaster Loans (EIDL)
Within the estimated $2 trillion stimulus package, approximately $10 billion for EIDL and $349 billion for Paycheck Protection Loans to help small businesses have been allocated. For business owners, this is a great way to get some cash infusion into your business to cover those expenses and keep you afloat. This loan isn't anything new, but COVID-19 is now defined as a "disaster" that makes it available. You can visit Benefits.gov for more information and how to apply online.
EIDL benefits:
Loans are up to $2M
Loan amounts are based on amount of economic injury
The term is 30 years
Interest Rates are 3.75% for small business and (2.75% for non-profits)
The first month’s payments are deferred a full year from the date of the promissory note.
There are no upfront fees or early payment penalties charged by SBA. The repayment term will be determined by your ability to repay the loan.
The EIDLs expanded provisions include:
EIDLS can be approved by the SBA based solely on an applicant’s credit score (not repayment ability and no tax return is required).
EIDLS smaller than $200,000 can be approved without a personal guarantee. They are also not requiring real estate as collateral and will take a general security interest in business property.
Borrowers can receive $10,000 in an emergency grant cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss.
It expands access to sole proprietors or independent contractors, as well as tribal businesses, cooperatives, and ESOPs with fewer than 500 employees and all non-profits including 501(c)(6)s.
For Business Owners: Paycheck Protection Program (PPP) & Loan Guarantee
The U.S Small Business Administration (SBA) 7(a) lending program backs small business loans through local lenders. Currently, there are 1,800 banks across the county that are already approved as SBA lenders, and there could be more in the future. This is designed to provide an incentive for business to continue paying their workers, and the loans can be up to $10 million for payroll and certain operating expenses.
See here for more detailed information and step by step calculation by The U.S. Chamber of Commerce.
Here are some bullet-points of the loan program:
Offered to small businesses with fewer than 500 employees, select types of business with fewer than 1,500 employees, 501(c)(3) non-profits with fewer than 500 workers and some 501(C)(19) veteran organization (have to be in operation before February 15, 2020)
Self-employed, sole proprietors, freelance and gig economy workers are also eligible to apply (again, you have to be in operation before February 15, 2020).
Loans are given up to a maximum of the lesser of $10 million, or 2.5 times the average monthly payroll costs – including wages for employees making under $100,000, as well as expenses for paid sick leave, healthcare and other benefits - during the 1-year period before the date on which the loan was made.
The maximum interest rate under this program is 4%
The loan term is up to 10 years
No personal guarantee or collateral is required for the loan
Payments are deferred up to six to 12 months
Part of this loan may be forgiven and not counted as income to you, if it’s spent during the first eight weeks on operating expenses.
Loans are forgiven when you maintain the same average number of employees for the first eight weeks of the origination date of the loan.
Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000
Rent pursuant to a lease in force before February 15, 2020
Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020
Group health insurance premiums and other healthcare costs.
As of today, banks are not yet prepared to receive applications for the PPP but will be soon. The best way to find out the application process is to contact your local banks and be prepared. In the meantime, you can gather your business financials and other documents you will likely need to provide with your application while you wait for that window to open.
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