Even as the IRS was still figuring out how to implement the 2017 TCJA (Trump’s Tax Cuts and Jobs Act), along came the SECURE Act (the Setting Every Community Up for Retirement Enhancement Act of 2019), which added a new set of complexities to this puzzle we call financial planning. Then COVID-19 arrived, ushering in an urgent need for legislation to help Americans endure the most significant economic crisis since the Great Depression. The first step in that relief: the CARES Act—the $2.2 trillion Coronavirus Aid, Relief, and Economic Security package that was passed in March—which offers multiple avenues of relief for individuals, as well as small business relief options, including PPP loans, EIDL advances, and the PUA program.
If you feel overwhelmed by this flood of acronyms and relief programs, you’re not alone. I feel like I’m drowning in a bowl of alphabet soup! Decoding the complexities of each Act and understanding how they all work together is a momentous task. Even when I’m able to track down all the ‘facts,’ the answers remain vague—at best—and new regulations and practices are evolving even as I write. Here’s just a taste of the layers of complexity that are swirling in my spoon:
- For Retirees
The SECURE Act was designed to increase retirement savings, but among the endless nuances to the law are new restrictions on inherited IRAs. In the past, the law allowed beneficiaries of inherited IRAs to “stretch” withdrawals over a lifetime to minimize taxes due on the gains. Under the SECURE Act, assets inherited by most non-spouse beneficiaries must be withdrawn within 10 years (how that helps the middle-class increase retirement savings is anyone’s guess.). Under the CARES Act—which came along just months later—RMDs (Required Minimum Distributions) were suspended for all retirement accounts in 2020. Simple concepts, yes, but they are complicated in practice. Julie set up her estate plan with complex provisions to assure that her IRA would provide a lifetime of income to her three children, but the elimination of the “stretch IRA” means her Trust may need redrafting. Ann inherited an IRA when her mother died in February 2020. According to the CARES Act, she doesn’t need to take RMDs until 2021. But does the 10-year withdraw limit start this year, or next? Will she have to catch-up on the suspended RMDs by 2030? I’m still figuring it out.
- For Homeowners
The CARES Act allows homeowners to request a forbearance on their mortgage for up to 180 days with no additional fees, penalties, or interest. After 180 days, they can request an extension for an additional 180 days. It sounds like a great way to help cash-strapped homeowners avoid foreclosure amid the pandemic, but exactly how the program will play out is not so clear. Marty was furloughed last month and is “in line” for forbearance with his lender. Once the forbearance is approved, when will he need to repay the suspended mortgage payments? After 180 days? After one year? According to my research, it looks like repayment options are up to the individual lender and may consist of several payment options, including a lump-sum payment at the end of the suspension period (which is unlikely to help people like Marty whose paychecks have stopped rolling in) or via as-yet-undefined payments over time. Hmmm.
- For Small Businesses
The CARES Act also includes a dizzying menu of relief options for small business owners. The Payroll Protection Plan (or PPP) is designed to help business owners keep paying their employees. The amount of the loan is based on 2.5 months of payroll and other qualified expenses. The loan may be forgiven when spent on those qualified expenses within eight weeks of getting the money as long as 75% of the money is used for payroll. If the money received has not been forgiven by the SBA, then the money has to be repaid in two years.
Another program, the Economic Injury Disaster Loan Emergency Advance (or EIDL) offered by the Small Business Administration (SBA), was supposed to provide $10,000 grants to small businesses. That rollout has been a mess. Money ran out within two weeks, advances were delayed, and the rules changed again and again. Many business owners that applied received $1,000/employee (or $1,000 for self-employed individuals), but many more are still waiting, and it seems that funds have run out… again. EIDLs do not have a forgiveness aspect like the PPPs, but there is a 30-year repayment period at 3.75%. The $1,000 per employee “advance funds” are not included in the EIDL loan—so they are forgiven. That’s about as clear as mud. So when Caryn called me over a month ago and asked whether she should apply for the PPP, the EIDL, or both, it took hours of research to give her an answer. And the guidelines are still shifting by the day.
To receive a PPP loan, the borrower must certify that the loan is “necessary,” which is why many approved borrowers held out on accepting the money. Then, on May 14th, with just one day to spare before the deadline to accept funds, the SBA issued FAQ 46 that said that all amounts under $2 million are deemed to be received “in good faith.” My client Mark received approval by his lender for a substantial and very welcome loan, but he held off until the last minute because he was unclear about how to define “necessity,” and he didn’t want to see his name on the 6 o’clock news. (Yes, PPP Shaming has become a thing).
- For Self-employed/Gig Workers
Just when I thought I had figured out the best guidance for my self-employed clients, the PUA (Pandemic Unemployment Assistance) program was introduced. Designed to assist self-employed, freelance, and gig economy workers (think Uber drivers), the PUA may put more cash in the bank than the PPP for some, but because the PUA is taxable and the PPP is not, choosing between the two is anything but simple!
Even today, the alphabet soup of relief continues to evolve and expand. All eyes are now watching the $3 trillion Heroes Act that passed the House last Friday and moves to the Senate for consideration. After two bi-partisan bills, the new initiative will have to overcome hurdles in order to become legislation. The good news is that the government and the Federal Reserve have acted collaboratively, decisively, and responsibly by extending aid in a crisis. Even if there are operational flaws, they’re trying.
If you’re bored in quarantine, I envy you… at least a little! I am spending a good chunk of my time reading legislation, regulations, and commentary to answer your questions about each program. My goal is to ensure you receive the relief you need, when you need it, and that each choice we make will be beneficial to your financial life over the long term. Until the kinks are ironed out, please continue to ask questions. I will continue to search for the answers and offer guidance when I can. We’re all in this together, and even when we’re neck-deep in alphabet soup, I am here to help you swallow it… one bite at a time!