CARES Act: What you need to know about the new economic stimulus package
Highlights of the new law
- Most Americans making less than $75,000 have received a one-time cash payment of $1,200; more if you’re married and/or have children 16 and under. The amount is reduced (or eliminated) at higher income levels.
- Unemployment insurance is expanding, at least temporarily, with a $600 per week higher benefit for up to four months, and with benefits extended to self-employed workers and independent contractors.
- Retirement-related changes: Required Minimum Distributions (RMDs) are waived in 2020. Penalty-free withdrawals are available if you’ve experienced adverse financial consequences as a result of specifically defined COVID-19 hardships. You can suspend loan payments for a year from a retirement plan loan under certain conditions.
The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (commonly known as the CARES Act) was signed March 27, 2020, delivering the largest emergency aid package in U.S. history.
The federal government is offering a lifeline to American workers, small businesses, and corporations, to help them weather the COVID-19 health crisis and the resulting global market volatility.
We’re here to help you power through this uncertain period and understand how this new legislation may affect you and your family. While each person’s situation is different, here’s a quick look at some of the CARES Act provisions that may provide you some financial relief.
How the CARES Act may help you
Most Americans earning less than $75,000 (single filer) by now have received a one-time cash payment of $1,200.* These cash payments were based on adjusted gross income (AGI) from your 2018 or 2019 tax returns. (Meaning, if you’ve filed 2019 taxes, it was based on that.)
The table below gives you a better idea of how much was provided.
Stimulus checks to individuals and families
Heads of households
|If your AGI is $75,000 or less||If your AGI is $150,000 or less||If your AGI is $112,500 or less|
|Reduced if your income is higher than $75,000||Reduced if your income is higher than $150,000||Reduced if your income is higher than $112,500|
|No check if your income is higher than $99,000||No check if your income is higher than $198,000||No check if your income is higher than $136,000|
|Plus $500 per child age 16 and under. If you have children 16 and older who are claimed as dependents on your tax return, they don’t qualify for a stimulus check.|
The big question: Is the check in the mail?
“This was a massive effort to distribute $300 billion,” says Tyler De Haan, director of business development—retirement solutions for Principal®. “Checks started going out in mid-April, but it may take a few months before they've all been mailed.”
Tip: If the Fed government has your direct deposit information, you’ll receive your check electronically, meaning faster. Otherwise, it will be sent via postal mail. If you’ve filed tax returns electronically in 2018 or 2019, the government will have that information.
Required Minimum Distributions (RMDs) waived in 2020
The act also gives taxpayers the option to not take an RMD in 2020, which can potentially be important if financial markets are slow to recover from recent declines.
“This can be a real win if you don’t need the money this year. Leaving your funds invested longer instead of taking your RMD in a volatile market can give your assets time to recover from the initial and subsequent shocks,” says Heather Winston, assistant director of financial advice and planning at Principal.
Plus, when you take an RMD, it’s taxable, so holding off is a way you may be able to reduce your income for 2020. For those who have already taken an RMD at any time in 2020, the IRS has extended the deadline for rolling the distribution back into the plan or Individual Retirement Account (IRA) to August 31, 2020.
Expanded unemployment insurance
Unemployment insurance (UI) now includes a $600 per week increase in benefits for up to four months, and extends benefits to self-employed workers, independent contractors, and those with limited work history.
The federal government will also provide temporary funding of the first week of unemployment for states, eliminate any normal waiting period, and extend UI benefits for an additional 13 weeks through December 31, 2020. Learn more from the Department of Labor (DOL).
Tax favored withdrawals from retirement plans
The CARES Act waives the 10% early withdrawal penalty on retirement account distributions for COVID-19-related purposes. This includes if you, your spouse, or a dependent is diagnosed with COVID-19 or you’ve experienced “adverse financial consequences” as a result of certain events making you a "qualified individual":
|You*||Your Spouse||Your Dependent||Member of Your Household|
|Diagnosed with SARS-COV-2 or COVID-19|
|Adverse financial consequences as a result of one of these events that resulted from COVID-19:|
Work hours reduced
Reduced rate of pay or self-employment income
Unable to work due to lack of childcare
Job offer rescinded or start date delayed
Closing or reduction of hours of a business owned or operated by one of these persons
* Individual requesting distribution
This applies to individual retirement accounts (IRAs), 401(k)s, and certain qualified retirement plans and annuities. The maximum you can withdraw collectively from your accounts is $100,000. The usual mandatory 20% withholding for taxes won’t apply up-front, but the income from these distributions would be subject to taxes over three years.
You can pay it back to the account within three years. Doing so wouldn’t affect the maximum contribution you can make each year to your 401(k) or IRA. De Haan says if this type of withdrawal makes sense for you, check with your employer to see if your retirement plan allows you to do so.
Loans from retirement plans
If you have an outstanding loan from your retirement plan with repayment due in 2020, you can delay your repayments for up to one year. Subsequent payments will be adjusted to account for the delay.
For "qualified individuals" (see above), the loan cap is increased to $100,000 or 100% of your vested account balance, whichever is less, for loans taken within 180 days of the law’s enactment. Check with your employer to see if your retirement plan has chosen to allow this.
Additional guidance may be needed from the DOL on increased loan limits. We’ll update this story when that’s released.
Student loan relief
Payments and interest on all federal loans held by the U.S. Department of Education will be suspended for six months, until September 30, 2020. It will be automatic, so you don’t have to make a request for it. (This only applies to federally-backed loans, not private student loans.)
“This will be a welcome relief for a lot of borrowers. And if you decide to continue making the same monthly payment, you’ll pay down the principal faster,” says Winston. “Every little bit helps.”
The Department of Education will also suspend collections efforts on defaulted federal student loans and stop garnishing wages and taking tax refunds.
Employers may also contribute up to $5,250 in 2020 toward student loans, and the payments won't be taxable income to employees. This cap applies to both student loan repayment benefits and other employer-provided educational assistance such as tuition, books, and fees.
Other recent changes offering financial relief
- Federal tax filing, payment, and IRA contribution deadlines. The deadline to file and pay federal income taxes has been extended from April 15 to July 15, 2020. The same extension applies to 2019 IRA contributions. State tax deadlines may vary, so check with your state’s Department of Revenue. To learn more, visit IRS.gov.
- Paid employee leave. The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with paid sick leave or expanded family leave related to COVID-19 until December 31, 2020. Learn more on the DOL’s site.
- Evictions and foreclosures. On March 18, the Department of Housing and Urban Development (HUD) implemented an immediate moratorium on foreclosures and evictions for single family homeowners with FHA-insured mortgages through at least August 31, 2020. Learn more on the HUD site.
- Relief for businesses: If you have a small- to medium-sized business, there are a number of provisions in the CARES Act for tax credits, loans, grants, and other programs. To learn more, read this article.
- Need a financial professional? If you want help navigating your finances during these uncertain times, we can help you find a financial professional in your area.
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