Wealth Management

What is the Paycheck Protection Program?

The U.S. federal government just passed a big coronavirus relief bill, aimed at supporting small businesses through this difficult time. One of the measures in the bill is the Paycheck Protection Program—here’s a link to everything you need to know.

Breaking Down the Coronavirus Aid, Relief, and Economic Security (CARES) Act

The Senate finally passed the $2 trillion relief package referred to as the CARES Act after some delays and theatrics. When you factor in the loans and other parts, the relief package total is over $6 trillion.  The main part of the $2 trillion relief package represents about 10% of our GDP. This is a very large bill with over 850 pages, so there is a lot to unpack.  Let’s break down this relief package to understand how this will impact you.

Coronavirus Aid

Money will be received by everyone qualifying based on the gross adjusted income of your 2019 tax return, or your 2018 return if you have not yet filed, which should be the case for most people. Below is a chart of how much to receive based on tax filing status and adjusted gross income.

In addition, you should receive an additional $500 per child under the age of 17. Most checks will be sent via direct deposit based on the bank account used for your tax returns and the rest will be mailed.

Additional Unemployment Benefits

Unemployment benefits have been expanded and will cover self-employed individuals and independent contractors. Unemployment benefits will be increased by $600 per week in addition to the normal unemployment benefit for up to four months. The length of time an individual can receive unemployment was extended as well.

No RMDs for 2020

Any individual who would normally be subject to taking a Required Minimum Distribution (RMD) for 2020 will no longer have to for 2020, based on the new bill. This applies to any individual that has an IRA, 401(k), 403(b), 457(b), SEP-IRA, SIMPLE IRA and inherited IRA. This change DOES APPLY to anyone that turned 70.5 in 2019 and delayed their first RMD till 2020, so no distributions are needed, and delaying in this instance is rewarded.

Easier Access to Retirement Accounts

Those under age 59.5 impacted by COVID-19 can take hardship distributions in 2020 of up to their entire account balance or $100,000 (whichever is less) from 401(k)s or IRAs, without being charged the 10% early-withdrawal penalty or mandatory withholding requirements. The income for tax purposes will be spread over three years unless you choose to include it all in 2020. The great part is individuals will have up to three years to repay this distribution if they choose (in effect, having treated it as a loan). The advantage of repaying the distribution is it would substantially reduce the tax impact, and you can even amend returns to get a refund after repaying the amount!

Many employer-sponsored plans, like 401(k)’s, offer employees the ability to take out loans against their retirement accounts. The annual cap on loans from such plans was increased to $100,000 or 100% of the plan balance, whichever amount is smaller. Currently, plan borrowing is limited to $50,000 or 50% of the vested account balance, whichever is less. The repayment of these loans can also be delayed up to one year. This is another potential way to access cash if needed, without paying taxes if the loan is repaid.

Changes to Charitable Gifting

For those who are charitable minded, there is a large increase in the tax-deductibility of charitable gifting. For 2020, cash gifts made to charities can now equal 100% of Adjusted Gross Income (AGI). These charitable contributions CANNOT be used for Donor Advised Funds or 509(a)(3) supporting organizations. Normally the limit is 60% of AGI, so a person with a $200,000 AGI can now deduct up to $200,000 if charitable gifting is made in cash, where normally they would be capped at $120,000 (60% limit).

Delay Student Loans

Individuals with student loans do not have to make any payments until September 30th and the loans will not accrue any interest during this time. If you wish to take advantage of this, you must be proactive and contact your loan provider since voluntary payments are still allowed. Most collection efforts will be suspended during this time, as well. For 2020, employers can pay up to $5,250 of student debt without it having to be included in the employee’s income.

Updates to Health Care Benefits

All tests for coronavirus must be covered by your insurance. Over the counter medicine and feminine healthcare products are now qualified expenses for Health Savings Accounts and Medical Savings Accounts.

Tax Credit for Retaining Employees

A new Employee Retention Credit has been created that is worth up to 50% of the qualified wages paid for each employee. To qualify there are several factors that include:

  1. Business operations were partially or fully suspended due to COVID-19
  2. Gross revenue is less than 50% of revenue in the same quarter vs. the prior year.

There are many layers to this credit so please work with your tax advisor for more information.

Forgivable Small Business Loans

Part of the CARE Act includes the Paycheck Protection Program. This is a partially forgivable loan through the Small Business Administration (SBA) and will be available through SBA lenders. Qualifying businesses include sole proprietors with fewer than 500 employees (or employee size standard under NAICS Code if over 500 employees). The loans will be for the lessor of $10 million- or 2.5x the average payroll costs over the last year at a rate no greater than 4%, with terms up to ten years. The loan may be forgivable based on how the proceeds are used and the number of employees retained.

Businesses May Defer Payroll Taxes

Businesses will be allowed to defer payment of payroll taxes for 2020 over a two year period with 50% due December 31, 2021 and the remaining 50% by December 31, 2022

Net Operating Loss Rules

Now corporations (excluding REITs) with Net Operating Losses (NOLs) from 2018,2019 or 2020 can now be carried back for up to five years. NOLs now can be used to offset 100% of taxable income for 2018, 2019 or 2020 (previous rules were capped at 80%).

What to Do If You’ve Lost Your Job

If you’ve lost a job, gig work, or are struggling financially right now, here are a few things you can do:

  • File for unemployment. The coronavirus relief package that the Senate passed recently is expanding unemployment benefits — extending the length of time people will receive full pay as well as raising the weekly maximum benefit. More good news: contractors, gig economy workers, freelancers, etc. will be made eligible for unemployment. There is also guidance that states should allow flexibility around unemployment for workers who have been furloughed, are under quarantine or have left work for fear of infection.
  • If you’re a homeowner or have other recurring monthly debt, call your lender and ask them to pause your mortgage payments and get into a forbearance program. You can try the same thing for car loans, credit cards or other recurring debt.
  • If you rent, talk to your landlord. Many cities have halted evictions. Some of the same flexibility in payments being offered to those with mortgages could allow landlords to get a break on their monthly payments for properties they rent to people.

Source: NPR Life Kit

Impact of COVID-19 on Pension Plans

Given current circumstances, if you are at all concerned about your company’s ability to afford your 2020 defined benefit/cash balance pension plan contributions, you must consider action now that will allow you to reduce or eliminate the plan’s 2020 required contribution.

Most plans provide that benefits are “earned” once employees complete 1,000 hours during the year.  For full-time employees, 1,000 hours is usually reached approximately June 21st for a calendar year plan.  At least 15 days before this date, the plan may be “frozen” by providing a notice to plan participants and amending the plan to curtail benefits.  Once amended, this will stop plan benefits from increasing, thereby eliminating the “normal cost”, typically the largest component of a plan’s required contribution.  If the economy recovers quickly and 2020 turns out to be a good year, you may unfreeze the plan by amending before year-end to restore your plan contribution to its previous level.

If the plan is not amended to freeze benefits before the 1,000-hour threshold, it will be very difficult, if not impossible, to significantly reduce the 2020 required plan contribution. 

Compounding this situation, if your plan investments have suffered losses in the stock market, the decline in value will tend to increase plan contributions.  Depending on the value of your plan assets at the end of 2020, a contribution may still be required for the year even if the plan is frozen, though it will be much reduced from what it would be if the plan is not frozen.

Also, while this is hopefully premature, in recessions companies may need to reduce staff.  Please be aware that the IRS considers a 20% reduction in plan participants to be a “partial plan termination.”  In the event of partial plan termination, the tax code requires all affected participants to be fully vested in their plan benefits.

Finally, be aware that there are not currently any changes to the 2019 funding requirements (contributions due in 2020), but the IRS, DOL and PBGC are exploring the possibility of some sort of relief.

Financial Relief for Those Impacted by the Coronavirus

While it is amazing people are willing to stay home to help lower the spread it is, unfortunately, having a real financial impact on individuals. Below are some of the ways relief is being offered for those impacted by coronavirus. While it is expected that more relief is on the way below are some things you can do to help today.

1. Contact Creditors

Many creditors like the Apple Credit Card are allowing people to skip payments for the month of March without accruing additional interest. Most auto loans also have a feature to allow you to skip a payment or two in cases of financial hardship.

2.  Contact Student Loan Providers  

President Trump recently announced that all federal student loans will have interest waived during this period. Talking with your loan provider may create some options for payment deferral if needed. 

3. Delay Filing Taxes

Filing and payments have been extended to July 15th for Federal and June 15th for State (CA). If you pay quarterly taxes or expect to owe taxes for 2019, this can help temporarily ease the burden. If you generally get a refund now may be an excellent time to file your taxes.

4. Talk with your utilities

Governor Newsome passed an executive order earlier this week to protect citizens and makes sure they have basic services like gas, water, electric internet and cell services.

5. Your Check Is in the Mail

The government is working on sending checks to (almost) everyone and the goal is to have the first payments issued April 6th and a second round issued May 18th. The details are being finalized and we should have greater clarity soon.