In this bulletin, we wanted to provide details on two CARES Act provisions mentioned in our 3-31-20 bulletin unrelated to the PPP loan as well as a few pointers on the PPP loans, unemployment for self-employed individuals, new EIDL grant restrictions and the Employee Retention Payroll Tax Credit.

While SBA loans will generally be used as the primary source of funds, those loans do not have to be the only funds to get you through what will likely be a three to six-month financial ramp-up period after you’re back to work. Here are two fund sources using retirement plan monies.

Increased Borrowing Allowed from 401K – The Act increases the amount you may borrow from your individual 401k plan or other retirement accounts (not IRA’s) during the 180 days after the CARES Act was enacted. You can now borrow up to 100% of your vested account balance interest (up from 50%) to a maximum of $100,000 (up from $50,000). This is allowed so long as your retirement plan provides for participant loans. The Act also allows for some delays in repayments of certain plan loans. 

Penalty-free Distributions from Retirement Accounts – The Act allows a distribution to certain “eligible” individuals of up to $100,000 from IRA’s and retirement plan accounts without the 10% penalty for those under age 59 ½ and also allows for favorable tax treatment to anyone taking an eligible distribution regardless of age. Details include:

– “Eligible” individuals are those who were sick with the Covid19 virus, or their spouse or dependent was sick with the virus or a person who experienced adverse financial consequences such as being quarantined, furloughed or laid off, or who suffered reduced working hours or was unable to work due to the lack of child care.

– Eligible individuals do NOT include those that continue to work and simply had their compensation reduced due to their employer’s business contraction due to the virus. However, the Act does suggest that the Secretary of the Treasury has the ability to expand the list of eligible individuals. 

We’ve not seen any expansion of the list at this time.

– If the distribution amount is repaid within three years from the date of the distribution, there is no income tax on the distribution. The repayment can occur in multiple payments so long as the three year repayment period is met.

– The income tax can be spread over three years if there is no intention to repay part or all of the distribution. Any amounts NOT repaid within three years can be reported as taxable income ratably over the three year period beginning with the year the distribution was received. You can also choose to tax the entire unpaid portion in 2020.

– Distributions from 401K’s to Eligible individuals will meet the hardship definition of the plan and may be exempt from income tax withholding. Repayments will NOT be subject to the normal rollover time limit rules as well. You should check with your retirement plan administrator regarding any certifications you may be required to provide to be considered eligible for the 401K plan distribution.

While the increased borrowing limit and the penalty-free distribution provisions allow for access to additional funds, you should consult with your advisors to determine if either of these options are appropriate for your situation.  

Considerations should also include the diversification of your retirement plan assets as you may not want to sell investments that have suffered substantial declines in value during this crisis in order to take the loans or distributions.

Funds Beyond SBA Loans – It makes sense to have a business line-of-credit available and even a home equity line of credit available should you need to cover any larger expense needs that may arise. Having these additional sources provides additional financial backstop if needed. 

While we hope you won’t need to use either of these resources, having them available makes sense.

PPP Loan – Here’s a few bullet points:

– Some folks have applied for the PPP loan while others have chosen to wait. For those that are waiting, make sure you prepare the application and compile the data needed so you can submit it quickly if changing circumstances suggest an earlier application submission time makes sense.

– We’ve seen additional guidance that lenders will have to disburse PPP loan funds within ten days of approval and will NOT be able to defer disbursement of the funds beyond that. 

Procedurally we’ve seen some lenders are allowing a maximum 5-day wait and if not accepted within the 5 days, then you must reapply for the PPP loan.  

– The eight week reporting period to determine the amount of loan forgiveness begins with the date of the first disbursement of the funds. We have learned that some folks who applied early for their PPP loan have received their funds already. Many more folks are getting notified that their application has been approved and funding should hit as early as this coming week. The original thought that completing a PPP loan will take several weeks may not be the case as there has been more expedience in completing these loans already. 

Applying for Unemployment if Self-Employed (S/E) – The CARES Act provides for unemployment benefits for those who are self-employed (no W2). Most of the state unemployment divisions are not yet set up to accept unemployment applications for S/E individuals. Many S/E’s have applied for unemployment benefits with their state unemployment division and have been denied. If you are S/E, you should check your state unemployment website for any guidance and timing as to when they will be ready to accept applications for S/E’s. Any S/E who applied and was denied should reapply once their state unemployment division is ready to accept the self-employed applications.

Economic Injury Disaster Loan (EIDL) Grant – Many folks applied for the EIDL $10,000 advance grant at the onset of the COVID event. Last week the SBA announced its decision to set a $1,000 per employee cap on the advance. 

Anyone who applied and who has less than ten employees will be capped at $1,000 per employee.

Employee Retention Payroll Tax Credit – Some have asked whether this credit has comparable benefits to a PPP loan. The maximum credit allowed is 50% of an employee’s wages through December with a maximum credit of $5,000 per employee. By way of example, if you have six employees each earning more than $10,000 through December, the maximum payroll tax credit you could receive is $30,000 (6 x $5,000). 

In most cases, a PPP is more favorable than this credit. And a reminder that you can’t take both the Credit and the PPP. It’s one or the other.

Let us know if you have any questions.

Stay your distance, stay social & stay safe!