Benefits from the COVID-19 CARES Act for Individuals
For individuals, relief comes in the form of direct cash payments, expanded unemployment protection, charitable contribution deductions and qualified plan/IRA early distribution penalty waivers. The CARES Act provides approximately $2 Trillion dollars in economic relief. As you’d expect, a relief act of this size (some 800+ pages of legislative language), contains dozens of provisions. The provisions reviewed here are some of the key elements that may help you in this time of economic disruption.
Cash Payments (Stimulus Check)
The most reported provision in the CARES Act is called Recovery Rebates. This provision will provide direct cash payments as follows:
- $1,200 to single individuals (includes those who file as head of household)
- $2,400 for married filing jointly
- $500 for each dependent child age 17 or younger.
These payments are phased out for higher income earners. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold.
- Singles – phase out begins at $75,000 of Adjusted Gross Income (AGI). Completely phased out by $99,000 of AGI.
- Married filing jointly – phase out begins at $150,000 of AGI. Completely phased out by $198,000 of AGI.
- Head of Household – phase out begins at $112,500 of AGI. Completely phased out by $146,500.
Treasury will use the information from your 2019 tax return, or if not available, they will use your 2018 tax return. The benefit will be paid even to those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits. For taxpayers who have authorized direct deposits of a tax refund or other federal payment after December 31, 2017 Treasury will use this information to direct deposit the funds.
Unemployment Insurance Temporary Adjustments
This portion of the CARES Act has multiple prongs including increased payments and eligibility for workers who are not typically covered by unemployment insurance.
- Pandemic Unemployment Compensation provides for unemployment compensation to be increased by an additional $600 per week for a maximum of 4 months. This is available to any individual who is receiving unemployment insurance or Pandemic Unemployment Assistance.
- The Pandemic Unemployment Assistance program is a new program that will run from January 27, 2020 through December 31, 2020. This program provides unemployment coverage to workers who are self employed, independent contractors, and others who don’t normally qualify for unemployment insurance.
To qualify for unemployment Insurance, you must be unable to work as a direct result of the Coronavirus public health emergency and not otherwise eligible for state unemployment programs. You will have to self-certify that you are unable to work because of the Coronavirus emergency’s impact on you, your family, your place of work, or other restrictions on your ability to work.
Employee Sick or Medical Leave Benefits
The CARES Act also requires most employers to provide employees with paid sick leave or expanded medical or family leave. While these provisions change quite a bit based on an employers size and type of organization, it generally requires employers to provide payment if an employee can’t work because they are quarantined or sick, or if they need to care for someone who is quarantined or sick.
Here’s how it breaks down:
- Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay if the employee can’t work because of required quarantine or symptoms or diagnosis of COVID-19.
- Two weeks of paid sick leave at two-thirds the employee’s regular rate of pay if the employee can’t work because they need to care for an individual subject to quarantine or they need to care for a child whose school or child care provider is closed.
- Up to an additional 10 weeks of paid expanded family and medical leave at twothirds the employee’s regular rate of pay where an employee is unable to work due to a caring for a child whose school or child care provider is closed.
While there are a number of provisions that deal with hospitals and public health, on an individual basis you may see an impact through your Health Savings Account or insurance plan. Medicare and all private insurance plans are required to cover COVID-19 related tests, treatments and possible vaccines. Meanwhile, qualified medical expenses from HSAs were expanded to include a number of expenses, including over-the-counter medical products needed in quarantine or for social distancing.
Remember if you or someone you know loses your job and health insurance coverage you can continue coverage under COBRA for a while. However, COBRA can be an expensive option, but sometimes still the best option. For others, the Affordable Care Act is still in effect and if you lose your job and insurance you should go to HealthCare.gov and search in your state for options. You also might qualify for Affordable Care Act subsidies if you are unemployed.
- You may now deduct up to $300 of charitable donations whether you itemize your deductions or use the standard deductions. This change is important since many taxpayers no longer itemize after the recent increase in the standard deduction.
- The 50% adjusted gross income limit on charitable deductions is suspended for 2020. By lifting this limit, if you itemize deductions you may be able to deduct all of your charitable contributions. Please note, if you are using the standard deduction – this change will have no impact on your taxes. However, you will still be eligible for the $300 deduction noted above.
- The 10% Corporate limit is increased to 25%.
The generosity of people donating to charities and nonprofits to help in this emergency is being rewarded in the tax code. Being able to deduct $300 without having to itemize may, even in a small way, make more generous donations possible.
CARES Act Provisions for Your Retirement Plans
The CARES Act provides numerous provisions that relate to retirement plans – aimed at helping those who may need additional income support after losing a job, contracting or being affected by COVID-19, or being impacted financially by Coronavirus.
Waiver of 10% Early Withdrawal Penalty
If you take a withdrawal from your IRA or other retirement plan prior to age 59 ½ you must pay a 10% penalty tax on the withdrawal. The CARES Act provides for a limited waiver of this 10% penalty under the following circumstances:
- Distribution is taken after 1/1/2020
- You (your spouse or dependent) are either (a) diagnosed with COVID – 19, or (b) you experience adverse financial consequences
- Withdraw no more than $100,000
This withdrawal will be subject to ordinary income tax; however you may spread the income ratably over three years. You may also choose to recontribute the funds and may do so within three years of the withdrawal without regard to regular contribution caps.
Waiver of Required Minimum Distributions
If you have funds in an IRA or other retirement account (such as 401(k)) you are subject to a required minimum distribution beginning at age 72. The required minimum distribution has been suspended for 2020. This includes 401(k) plans and profit sharing plans, 403(a) and 403(b) plans and 457(b) plans. It does not, however, waive the required minimum distributions for defined benefit plans
Increase in Loan Availability
The Act also increases the amount of a loan a participant can take from their 401(k).
- Prior to the CARES Act, the available loan was generally 50% of the present value of the participant’s account. Under the Act it increases to 100%.
- Prior to the Act, the maximum loan amount was $50,000. Under the Act it increases to $100,000 but only for 180 days from the date of enactment.
Significantly, this is an optional benefit that may be – but is not required to be – made available by plan sponsors.
Opportunities the CARES Act Presents to You
I would estimate that many of my readers have had negative financial consequences as a result of the COVID-19 Virus. Never in our modern history have we experienced a world wide shutdown as extensive, and debilitating financially, as the one we are presently in. The United States government has taken unprecedented actions to try to prevent what was a generally strong economy from falling off a cliff.
The advantages of qualified retirement plans and IRA’s that allow for deferment of taxes have been expressed for many years. Although everyone’s situations are different, I have long sounded the alarm as to the negative tradeoffs for these short-term tax benefits.
The first tradeoff is the lack of liquidity before age 59 ½ (with certain exceptions) unless you are willing to pay income tax AND a 10% early distribution penalty. The CARES Act (assuming a financial hardship due to Covid-19 is present) waives this 10% penalty. On a $100,000 distribution, that represents a $10,000 penalty savings! On top of that, it is possible that you have experienced a job loss, furlough, or reduction in pay. From a tax perspective, your tax burden may be less because your income will be less for 2020. Certainly you will want to consult with your CPA and Financial Advisor, but this Care Act just made a portion of your qualified retirement plan much more liquid to you, with many options for paying back and even spreading your tax burden. Have you ever thought of starting a business? Have you wished you could have access to other investments that are not available within your 401(k) plan? Have you thought about purchasing additional real estate? Without speaking to you directly, I can only imagine the opportunities present for you. But the moral of the liquidity story is that not all great opportunities reveal themselves after the age of 59 ½. Maybe this Care Act and the provisions within it were exactly what you needed to pursue your dream.
The second tradeoff with tax-deferred qualified retirement plans is that you are deferring your taxes. What could be bad about that you say? You are going to have to pay the tax bill not only on the amount you put into your tax-deferred plan but all the potential growth as well! I don’t know if you have turned on the news of late, but we are in the process of adding trillions of dollars to our national debt. Economic activity has come to a grinding halt, which lowers the tax revenue generated, while at the same time, trillions needing to be spent to attempt to stabilize the economy. In my opinion, we were already on an unsustainable path from a debt perspective. This pandemic just adds to this. The ability to take up to $100,000 for qualifying distributions, without a 10% early withdrawal penalty, at a time when your income may have been reduced, is an opportunity that should closely be examined.
Everyone’s circumstances are different, but I have always appreciated unique ways of looking at life circumstances. Sometimes what appears to be negative can really be the seed for your greatest opportunity. If you would like help identifying your own personal opportunities, we would welcome a conversation.