The CARES Act
As a first-rate estate planning attorney serving Montgomery County and beyond, Slutsky Elder Law understands the importance of preparing for the future. With COVID-19 causing businesses to close their doors as well as citizens to practice social distancing all over the U.S., the nation works to find the answer to the begged question…”What happens now?” Here’s what you need to know:
A hefty financial aid package for Americans affected by the coronavirus pandemic is on its way. The total? $2 trillion.
Aptly named the Coronavirus Aid, Relief, and Economic Security (CARES) Act, this law (which clocks in at 880 pages) contains numerous key measures in providing financial support to families, including direct cash payments of $1,200 to individuals, bolstered unemployment benefits, student loan payment suspension, and relaxed rules for when it comes to tapping into retirement savings.
This law sends a one-time direct payment of up to $1,200 for individuals (that goes double for couples) and $500 for each child 16 years old and younger. With that said, the absolute maximum a family can receive is $7,500.
Eligibility depends on income — single people whose adjusted annual gross income is $75,000 or less get the full $1,200. Those with higher adjusted incomes will get smaller amounts. Anyone making $99,000 or above gets no payment. For married couples, the $2,400 payment begins to phase out after a combined annual income of $150,000, with no payments to any couple making $198,00 or more. The Internal Revenue Service (IRS) determines your eligibility based on your 2019 or 2018 tax return. For those who haven’t filed in those years, the income is based on their Social Security Statement.
Treasury Secretary Steve Mnuchin states the first checks are to arrive within three weeks, assuming the IRS already has your bank information required for the direct deposit of any refund or payment. Those who have not provided their bank information to the IRS will most likely have to wait longer for their check.
Under the CARES Act, the federal government will increase state unemployment benefits for four months — to the tune of $600. Benefits are extended by an additional 13 weeks. Those who previously were not able to claim unemployment, such as gig workers and freelancers, will now also be covered.
To learn more about the unemployment benefits in your specific state, including updated policies related to COVID-19, visit CareerOneStop — a resource sponsored by the Department of Labor. It’s crucial to note that most local unemployment offices are to extend hours and recruit additional staff to assist with the influx of new claimants — but for now, be persistent!
Borrowers will not be required to make any payments for six months (through Sept. 30, 2020) on their federal student loans, although that money owed will have to be paid later. Interested accrued during this period will be waived. Only particular federal student loans are eligible — those owned by the Department of Education (DOE), including direct loans and loans made under the Federal Family Education Loans Program that were transferred to the DOE. Perkins Loans, FFEL loans held by financial institutions or banks, and private student loans are ineligible. Involuntary collection of defaulted student loans, like wage garnishment and claiming tax refunds, will be suspended.
Similar to previous disaster relief measures, this law loosens the limits on pulling money out of your retirement plan in the event of an emergency.
For those who test positive for COVID-19 or endure financial hardship due to the pandemic can take out up to $100,000 in retirement savings without having to pay the 10% penalty if younger than 59½. The provision applies to savings in a qualified retirement plan, such as an IRA or 401(k). Tax is still owed on the money taken out. The increased limit also applies to 401(k) loans.
This law creates the “Paycheck Protection Program,” which provides up to $349 billion to expand the Small Business Administration’s (SBA’s) 7(a) loan program to support new loan guarantees and subsidies.
Highlights of the Paycheck Protection Program include:
100% federally-backed loans to cover payroll, rent, benefits, and other expenses.
Existing SBA lenders can make loans under the program upon the SBA issuance of emergency regulations structuring certain facets of the lending process. The Treasury Department and SBA are authorized to issue regulations that permit certain “additional lenders” not currently allowed to make SBA 7(a) loans for program participation.
Maximum loan amounts equal to whichever is less:
$10 million; or
250% of average monthly payroll during the year before the loan is made, plus the balance of certain SBA disaster relief loans made between Jan. 31, 2020, and the date on which loans become available under the Paycheck Protection Program.
The standard SBA 7(a) requirement that state borrowers lack access to “credit elsewhere” is waived for this program’s loans.
These are non-recourse loans (unless used for an unauthorized purpose), meaning no personal guarantee or collateral is necessary.
Maximum loan term of ten years after the date on which the borrower applies for loan forgiveness under the program.
The maximum interest rate of 4%, with SBA annual fees and guarantee fees waived.
Borrows can defer principal, interest, and fee payments from 6 months to 1 year.
Business can obtain loan forgiveness equal to the dollar amount spent in the 8 weeks following loan origination on:
- Certain payroll expenses;
- Interest payments on mortgages incurred before Feb. 15, 2020;
- Rent on leases executed before Feb. 15, 2020; and
- Utilities for services initiated before Feb. 15, 2020.
The entire principal amount of the loan is eligible for forgiveness if spent on eligible expenses, except that forgiven amounts will be reduced for employee or salary/wage reductions as follows:
Eligible businesses for this program include those with up to 500 employees. If higher, the number of employees that satisfy the SBA’s otherwise-applicate, industry-specific thresholds for a “small business concern.” One special exception does exist; businesses in the accommodation and food sector, which may have up to 500 employees in their individual physical locations.
Eligible borrowers are expanded from “small business concern” to include other sole proprietors, independent contractors, self-employed individuals, nonprofit and veterans organizations, or Tribal business concerns. Borrowers must certify the loan is necessary for the uncertainty of current economic conditions; that proceeds will be used to retain workers and maintain payroll, as well as make mortgage, rent, or utility payments. They must also certify that they are not receiving money from another SBA program for the same uses.
The amount forgiven is to be reduced in proportion to layoffs. To calculate the reduction value, businesses can choose to compare their reduced workforce numbers to their average Full-Time Equivalents (FTEs) from Feb. 15 – Jun. 30, 2019, or their average FTEs from Jan. 1 – Feb. 29, 2020.
The reduction does not apply if, by Jun. 30, 2020, a borrower eliminates any reduction in FTEs that occurred between Feb. 15 and Apr. 26, 2020.
The forgiven amount will be reduced dollar-for-dollar by the amount of reduction in total salary or wages paid to an employee during the covered period that surpasses 25% of the total salary or wages of that employee during the most recent full quarter.
This only applies to salary or wage reductions for employees who did not receive wages or salary at an annualized rate of more than $100,000 during any single pay period in 2019. Salary/wage reductions for employees that are above that pay range do not impact loan forgiveness eligibility. The reduction does not apply if, by Jun. 30, 2020, a borrower restores any salaries/wages reduced between Feb. 15 and Apr. 26, 2020.
Forgiven amounts can be excluded from gross income for tax purposes. In addition to loan forgiveness already granted, a lender may report a value of expected loan forgiveness to the SBA for a loan or pool of loans. Upon such a report, the SBA will purchase this amount of the loan from the lender.
For lenders, program loans will receive a regulatory capital risk weight of 0%, and insured depository lenders will not be required to treat a modification of a program as a troubled debt restructuring (TDR) until such time as the relevant banking regulator determines such treatment to be appropriate.
The SBA will reimburse lenders for loan processing in an amount equal to:
(i) 5% of the disbursed balance for loans no more than $350,000;
(ii) 3% of the disbursed balance for loans exceeding $350,000 and less than $2 million, and;
(iii) 1% of the disbursed balance for loans of $2 million or more.
Helping You Plan For Your Future
For more information about what the CARES Act means for you and your financial future, or for estate planning in Chester County and the surrounding areas, contact Slutsky Elder Law today.