What is The CARES Act: A Complete Summary | First Command

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What is the CARES Act?

The CARES (Coronavirus Aid, Relief, and Economic Security) Act was enacted to provide financial stability and relief for individuals and businesses affected by the COVID-19 pandemic. Many types of relief are offered in this bill. Here, divided into broad categories, is a summary of these benefits:

Direct Payments

Most U.S. residents will receive direct payments of $1,200 for single filers or $2,400 for joint filers, plus $500 for each child under age 17. The payment will be reduced for those with higher taxable incomes. Reductions begin at $75,000 for single filers and $150,000 for joint filers. The total payment (individual/joint amount plus $500 per eligible child) is reduced by $5 for every $100 of income above those thresholds.  Assuming no eligible children, the payment would be fully eliminated for single filers at $99,000 of income and for joint filers at $198,000. Your eligibility to receive a direct payment will be based on the Adjusted Gross Income from your most recently filed tax return (2019 or 2018). There are no minimum income requirements to be eligible for this payment.

Expanded Unemployment Assistance

An additional $600 per week is provided to supplement existing state benefits for up to four months. An additional 13 weeks of unemployment benefits are provided for those who remain unemployed after state unemployment benefits have expired. This provision is applicable through December 31, 2020. The usual one week waiting period to be eligible for unemployment benefits is waived. Self-employed and other individuals who are generally ineligible for unemployment benefits may be eligible for benefits under these provisions of the CARES Act. Unemployment benefits are typically treated as taxable income. Recipients will receive Form 1099-G showing the benefits received. Some states may allow taxes to be withheld from unemployment benefits.

Tax Filing Deadline

The deadline to file taxes and make tax payments for 2019 has been extended to July 15, 2020.  No action is needed on your part to receive this extension. If you are required to file a state income tax return, check with your state’s tax authority to see if they have extended their deadline as well. The deadline for 2019 IRA contributions has also been extended to July 15, 2020.

Coronavirus Related Distributions from Retirement Accounts

This benefit applies if you have been impacted by the coronavirus (i.e., you have been diagnosed with COVID-19, have a spouse or dependent that has been diagnosed, or have experienced adverse financial consequences as a result of COVID-19 such as layoffs, business closures, childcare responsibilities, or quarantines). You may self-certify that you meet this requirement. If eligible, you may be allowed to take a distribution of up to $100,000 from most employer sponsored retirement plans 401(k), 403(b), governmental 457, TSP, etc.) or from an IRA or a combination of both in 2020. The 10 percent early withdrawal penalty is waived. The funds will be distributed without the usual 20 percent mandatory tax withholding. The income recognized from the distribution can be spread over three tax years, allowing you to space out your tax payments over time. However, depending on individual circumstances, it may be more beneficial to recognize all the income in a single year rather than pro-rating it, particularly if your 2020 income is substantially lower than normal. You will have the option to return all or a portion of the distribution back into the account within a three-year period. This “returned distribution” will not count against the annual contribution limits for those years. (If a portion of the “returned distribution” was already reported as taxable income in a prior year, that year’s tax return may need to be amended.)

Loans from Employer Sponsored Retirement Plans (ESRP)

Many employer retirement plans allow participants to borrow against their account balance.  A plan loan allows you to borrow money from your ESRP and pay it back to yourself over time, with interest. If you have been impacted by the coronavirus (same definition as above) you may borrow up to $100,000 from your ESRP or 100 percent of the vested balance, whichever is less. Loan repayments may be deferred for up to one year from when they would otherwise begin.  This potentially allows for a maximum payback period of six years instead of the usual five.  While payments are deferred, interest will continue to accrue, and subsequent payments will be adjusted to reflect this accrued interest. You will need to contact the plan administrator to ensure the plan permits these options. If you terminate employment with your current employer while you have a loan against the plan, the outstanding loan balance will be considered a distribution unless it is repaid. This applies to voluntary and involuntary terminations.

Required Minimum Distributions (RMDs) waived for 2020

All required minimum distributions (RMDs) from tax-qualified retirement accounts have been waived for 2020, both for your own retirement accounts and for accounts you may have inherited.  (Under normal circumstances, owners of tax-qualified retirement accounts must begin taking RMDs beginning in the year following the year in which they turn 70 ½.) This waiver applies to all individuals (not just those who are impacted by the coronavirus). If 2019 was the first year in which you were required to withdraw money from a retirement account and you deferred it until 2020, both 2019 and 2020 distributions can be waived.

Return of Distributions Already Taken

The extended deadline to roll back any 2020 RMD is on or before August 31, 2020.  

This rollover opportunity also extends to a non-spouse beneficiary with an inherited retirement account! Since non-spouse beneficiaries have never had any rollover privileges (with the exception of a direct rollover from an employer plan account of a deceased participant to an inherited IRA or Roth IRA), this is truly groundbreaking.

One Rollover Allowed Per Year

Any RMD rollover is not subject to the one-rollover-in-12-month restriction that applies to IRA-to-IRA rollovers. That means that if a taxpayer of RMD age already took an IRA distribution and rolled it back within 60 days (normally applicable only to amounts above the RMD), their RMD that was not part of that prior rollover can still be rolled over by August 31st without violating the rule.

The extension of the RMD rollovers until August 31, 2020 also includes multiple RMD distributions since the 12-month rollover rule does not apply.

Currently Scheduled Recurring Distributions

If you are currently scheduled to receive recurring distributions from your First Command accounts, please contact your Financial Advisor to discuss the options and strategies that would be most beneficial for you.

Health Savings Accounts (HSA)

The deadline to make 2019 contributions has been extended to July 15, 2020.

Student Loans Relief

This provision applies to Direct Federal Student Loans that were originated in the past 10 years and are currently held by the Department of Education. Required payments on eligible loans are suspended through September 30, 2020. No interest or penalties will accrue during this period. If you have automatic payments scheduled with your loan provider, those payments may continue as voluntary payments unless you contact your loan provider and take action to stop them. Payments which are skipped/suspended under this provision will still be counted as qualifying payments made for the purpose of loan forgiveness programs. Only Direct Loans and FFEL Loans currently owned by the Department of Education are eligible for relief under this provision. You can contact your loan servicer to confirm your loan’s eligibility for this relief. For all other forms of student debt, you should contact the loan servicer to inquire about other forms of relief they may offer. 

Many provisions of the CARES Act will require clarifying guidance from the IRS in order to be effectively implemented. The information above is based on our current understanding of the Act’s provisions and may evolve as additional guidance is issued.

We strongly recommend contacting your First Command Financial Advisor before taking any loan or distribution from your IRA or employer sponsored retirement plan. They can review your current situation and update your financial plan to reflect recent developments.  First Command and your Financial Advisor are committed to partnering with you in your ongoing pursuit of financial security.