Our investment, financial planning and wealth strategy groups combined efforts after the signing of the Coronavirus Aid, Relief and Economics Security (CARES) Act last Friday, March 27th to provide you with their initial assessment on how this unprecedented relief package could impact the outlook for the financial markets (Section I) as well as provisions individuals should be aware of in order to optimize the benefits afforded them through the CARES Act (Section II).
SECTION I: THE ECONOMIC AND MARKET PERSPECTIVE
This CARES bill is estimated at approximately $2.2 trillion. This is the largest fiscal package on record, estimated to be approximately twice the size of the fiscal stimulus plan during the Great Recession. And, this may not be the last fiscal package.
Source: White House, Cornerstone Macro.
These components combine to protect lives and ensure this healthcare crisis does not create a financial crisis. Some of the more important elements targeted at the economy include measures that protect workers and small businesses. Consumers represent 68% of our domestic economy and small business is the top employer. With expectations that unemployment could climb to over 10%, protections for small business to stop layoffs is of critical timeliness.
Here are a few highlights on what we deem important from an economic and market perspective.
- Small Business Provisions - The Act will help eligible businesses (approx. 500 employees or less) that have incurred losses because of COVID-19 to move forward from the business disruption. The $500 billion will provide direct loans and other investments to various industries including passenger airlines, cargo airlines and businesses crucial to national security. Some restrictions will apply for those that receive loans, including provisions for maintenance of employees.
The Act offers payroll assistance via $349 billion designated for a “Paycheck Protection Program” to help small businesses (including 501(c)(3) and (19) organizations and certain tribal business concerns) with fewer than 500 employees. Sole proprietorships, independent contractors, and other self-employed individuals are also eligible for loans. The available loan amount is based on a formula that takes into account the businesses’ payroll costs incurred by the business, with a maximum loan of $10 million. Loans must be used for payroll, heath care benefits, lease, interest on mortgage, rent and utilities. Recipients must also not be receiving duplicative funds from another source. These loans could possibly be forgiven in certain situations.
- Unemployment Insurance (UI) - CARES sets up a “Pandemic Unemployment Assistance” program that greatly expands the current UI program. The program runs through the end of 2020 and adds coverage for those previously not eligible for coverage such as self-employed, gig-economy workers (e.g. Uber drivers) and those who can’t work due to Covid-19. Among other benefits, laid off workers are generally eligible for half of their weekly wages up to 39 weeks and may receive an additional $600 per week.
Economic Considerations – Fiscal & Monetary Stimulus
With estimates of a decline of 10% or more in our domestic economy (i.e., GDP) in the second quarter, it is critically important that these funds make their way into the economy as soon as possible. As of December 31, 2019, the size of our national economy was $21.7 trillion (Bureau of Economic Analysis). So, the CARES package represents 10% of our pre-Covid-19-impacted economy. This will be helpful. However, with the breadth and depth of an economic recession unknown, these stimulus programs could mitigate the severity of a recession. But, not prevent a recession from happening.
When considering the combined fiscal and stimulus packages, Cornerstone Macro, an economic research firm for institutional investors, estimates the overall stimulus package to be approximately 20% of our economy (i.e., GDP). As the world is ever more dependent on global supply chains and export revenues, Covid-19 has complicated matters for many other nations as well. Based on estimates as of March 28, 2020, we note very high stimulus programs as a percentage of regional economies. Germany, which is the Eurozone’s largest and strongest economy, has an estimated (current and proposed) fiscal stimulus of 22% of its economy.
Source: Cornerstone Macro.
Our Long-Term Economic Outlook
It is important to note that governments and central banks across the globe are committed to supporting their respective economies and battling Covid-19. We believe that the severely constraining effects on the economy caused by Covid-19 will eventually pass and that capital markets will eventually see higher ground in the future.
SECTION II: WHAT THE CARES ACT PACKAGE MEANS FOR YOU AND YOUR FAMILY
We remain positive about the CARES Act stimulus package’s ability to get aid to those who are sick and the first responders who selflessly work to save lives. The current crisis was unforeseen. The upside to last Friday’s actions in passing the CARES Act is that we have now been provided with some “knowns” and helpful information where many “unknowns” once existed. Below are some provisions of the package that will most readily impact individuals and families:
Recovery checks for Individuals
The Act will provide immediate assistance to many taxpayers and their families with checks of up to $1,200 ($2,400 for those married filing jointly. The amounts paid would be increased by $500 for each of the taxpayer’s qualifying children).
The payments are reduced for higher-income taxpayers; they begin phasing out for taxpayers with adjusted gross income (AGI) of $75,000 for single, $112,500 for head-of-household filers, and $150,000 for those married filing jointly. The IRS will base these amounts on the taxpayer’s 2019 tax return, or 2018 tax returns if 2019 has not yet been filed.
Retirement funds
The Act allows “affected savers”, regardless of age, to take coronavirus-related distributions of up to $100,000 from retirement plans and individual retirement accounts in 2020 without the regular 10 percent penalty. The amounts withdrawn will be taxed as income but there is a three year period to pay these levies. Individuals may recontribute amounts withdrawn to eligible retirement funds within three years, regardless of that year’s contribution limit. Those individuals are defined as people who are diagnosed with COVID-19, spouses or dependents who have the disease or those experiencing financial consequences from quarantine, furlough, layoffs or having their hours cut due to coronavirus.
The Act allows individuals to take money from retirement plans in the workplace. Normally there was a limit in the amount borrowed of up to $50,000 or 50% of your vested account balance -- whichever is less. Under the Act, you can now borrow up to $100,000 against the amount you have saved in the plan. This would be considered a hardship withdrawal and would still be taxable but can be stretched over three years. Alternatively they can elect to put the money back into the plan or an IRA within three years and avoid the tax payments. The retirement plan administrator may rely on an employee’s certification that the employee satisfies the conditions required.
On Retirement Requirement Minimum Distributions (RMD), the Act would suspend those payments for 2020. This one year suspension also applies to those individuals with inherited 401(k)s, IRAs or Roth IRAs. However, while Roth IRA owners don’t need to take RMD, non-spousal beneficiaries who inherit ROTH IRAs must take RMDs. Those IRA owners who were starting to take RMD in 2019 and elected to delay their first distribution until April 1, 2020 don’t have to take that withdrawal, even though it counts toward the required 2019 payout.
Healthcare Aid
The Act provides for a “Public Health and Social Services Emergency Fund” to support public health and social services, hospitals, and healthcare providers facing COVID-19-related expenses and lost revenue. The Act also provides extensions for certain Medicare programs, Medicaid programs, public health programs, and other healthcare workforce programs.
Tax deductions
The “50 percent of AGI” deduction limitation for individuals who itemize will be suspended for 2020. Taxpayers who do not itemize will be able to deduct up to $300 of cash contributions to charitable organizations as “above the line” deductions.
There will be an exclusion of certain employer payments of student loans. Employers may contribute up to $5,250 toward an employee’s student loans in 2020, and those contributions would be excluded from the employee’s income.
CONCLUSION
This document is intended to provide a high-level summary of some of the most important components of the recently passed CARES Act. While these are unprecedented times, there are actions being taken to mitigate the economic impact and provide you a path forward.
As uncertainty and volatility will remain in the markets, we encourage our clients to take advantage of potential legislative relief that is coming through the CARES Act. We encourage you to reach out to your Calamos Wealth Management team to discuss these legislative items as they may relate to your financial plan.