Breaking down the CARES Act in 6 minutes

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Text: Guardian. Breaking down the CARES Act in 6 minutes. What is the purpose of the CARES Act?

The CARES Act, which stands for the Coronavirus Aid Relief and Economic Security Act, was signed into law by the president on March 27 of this year. And this act aims to provide financial relief due to the economic downturn caused by a coronavirus pandemic. The CARES Act includes things such as the rebate checks many people have heard about, loans for small businesses, some tax relief for businesses, and unemployment benefits.

Text: What should I know about the Paycheck Protection Program?

The paycheck protection program, or PPP, as it is commonly referred to, is really aimed at keeping employees of small businesses paid during this pandemic. That is really what is at the heart of PPP. And I think the top three things to know are first, that the maximum loan a business owner can get is 2 and 1/2 times their average monthly payroll cost, with a maximum loan of $10 million. Again, it is monthly payroll cost. So if you have average monthly payroll cost of $12,000, your maximum PPP loan would be $30,000.

The second important thing to know about PPP is that it is a forgivable loan, if the loan is used for certain expenses during an eight-week period after the loan proceeds are obtained. Now the SBA has said and told us that they expect at least 75% of the loan will be used for payroll costs, meaning they want the money used to pay those employees. As I said, that's the heart of what PPP is about.

Now the other 25% can be used on certain other expenses, such as certain rent expenses, mortgage, interest, and utility expenses, which kind of makes sense, because they're saying, we know we need to keep the lights on, the electric on, you got to pay your rent, got to keep things running. But really we want the majority, at least 75% of that money to be used to pay your employees.

And that loan forgiveness I just mentioned, if you use it during that eight-week period, use the loan for those expenses during an eight-week period, that loan forgiveness is income tax-free, which is a huge plus.

And a third thing to know with PPP is that it's not just for small business owners with employees, but also for sole proprietors. They're eligible for a PPP loan based on their sole proprietor income. So even if you're a sole proprietor with no employees, you still may be eligible for a PPP loan.

Text: How does the CARES Act affect RMDs?

An RMD, or a required minimum distribution, as much as the name says, is a minimum amount of money you're required to take out of your IRA or qualified retirement plan, such as a 401(k) plan, once you reach a certain age. For those who turned age 70 and 1/2 before the end of 2019, they are required to take an RMD from their IRAs and qualified plans.

For everyone else when they turn age 72, they will be required to take RMDs at that point. And there are penalties for failing to take RMDs, so this is important.

Now what the CARES Act does is that for those who would normally have to take out a minimum amount of money from their IRA or the 401(k) plan, those rules are suspended for 2020. So you don't have to take a distribution for 2020 for this year. An important note here is that people who turned age 70 and 1/2 in 2019 but did not take their first RMD in 2019, and would normally have been required to take that distribution by April 2020, April of this year, April 1, as well as a second RMD for 2020, they don't have to take either their 2019 RMD or 2020 RMD.

Also, for people who inherited an IRA from a relative, such as a parent, and would normally have to take an RMD from that inherited IRA, they would normally have to take one for 2020, they also do not have to take an RMD, because all RMDs from IRAs, as well as inherited IRAs, are suspended or waived for 2020.

Basically, I think what Congress is saying with this is that we know your retirement accounts have lost a lot of value during the stock market decline caused by the COVID-19 pandemic. And we're not going to force you to take money out as we usually do, take money out of your IRA that has seen significant losses.

Text: How does the CARES Act provide students relief?

The CARES Act suspends student loan payments of both principal and interest through September 30 of 2020 for federal student loans, and no interest will accrue on these loans during this suspension period. It's important to note that this is for federal student loans, not private student loans, so keep that in mind.

Also, employers may provide a student loan repayment benefit to employees on a tax-free basis. This falls under an educational assistance program I know many people are familiar with. And now an employer may contribute up to $5,250 annually toward employee student loans. And such payment would be excluded from the employee's income. Keep in mind that the $5,250 cap applies to both new student loan repayment benefit, as well as other educational assistance such as payments for tuition, fees, and books, provided by the employer under the current law.

Now this provision that applies to the student loan payments applies for payments made by an employer on behalf of the employee after March 27, 2020, and before the end of 2020, so before the end of this year.

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