Updated: Frequently Asked Questions About the Coronavirus Aid, Relief, and Economic Security (CARES) Act
ARTICLE May 7, 2020
We have received many questions from our shareholders over the last few weeks about the impact the Coronavirus Aid, Relief, and Economic Security (CARES) Act will have on their accounts with Homestead Funds. We’ve summarized some of the main parts of the CARES Act below to hopefully answer questions you may have about it and how it affects you.
The CARES Act was signed into law on March 27, 2020 and is intended to ease the financial stress caused by the coronavirus pandemic. While most of the CARES Act focuses on providing economic stimulus for businesses, several components impact individuals:
Individual Retirement Accounts (IRAs); Required Minimum Distributions (RMDs)
- Because the tax deadline has changed to July 15, 2020, you now have until that date to contribute to an IRA for 2019.
- RMDs from IRAs and certain employer plans are waived for 2020. This can be beneficial to investors by giving their portfolio a chance to recover from the volatile market. If you have a systematic distribution in place, you may call us to request a deferral for 2020. Your RMD will automatically start again in 2021.
- RMDs not taken in 2020 will not have to be made up in 2021.
- If you have already taken your RMD in 2020, you still may be entitled to relief under the CARES Act. Recent IRS guidance includes an extension until July 15, 2020, to complete time-sensitive actions, such as indirect rollovers of retirement account distributions. This would allow IRA shareholders to put their RMD back in their account whether it was taken in one distribution or spread out over multiple distributions. This extension is only applicable if you took a distribution(s) between February 1 and May 15, 2020 and haven’t rolled over any other distribution in the past year. The IRS relief is not applicable if you took a distribution in January 2020, however we believe the IRS may eventually provide additional clarification that addresses any distributions taken in January 2020.
- If you turned 70½ in 2019 and haven’t yet taken your 2019 distribution, you may elect not to take a distribution. If you are taking distributions under the five-year rule, the year 2020 will not count as one of the five years.
- Individuals will be permitted to take early withdrawals, up to $100,000, without the 10% early distribution penalty from IRAs or employer plans — such as 401(k)s — provided the distribution is a coronavirus-related distribution (CRD). To qualify as a CRD distribution, you must meet one or both of the following criteria:
- You, your spouse or dependent must have been been diagnosed with the virus by a test approved by the Centers for Disease Control and Prevention.
- You have experienced financial hardship because of the virus. The hardship might be a result of being quarantined, furloughed, laid off or losing childcare. Other hardships might also qualify.
- You will still owe tax on the CRD, but you may spread the reporting of the income over three years of tax returns, beginning with tax year 2020. Recontribution of CRDs to a plan or IRA can be done as one or more payments over three years and be treated as a direct trustee-to-trustee transfer. The portion you repay will not be subject to tax.
- If you are not yet 59½ but choose to take a CRD under the provisions of this new law, you will not be subject to an early distribution penalty.
Loans from 401(k) and other defined contribution plans
- If you need a loan from an employer plan, the limits have been temporarily increased.
- For those who have been affected by the coronavirus, the repayment period has been extended for one year (repayment would have otherwise been due during 2020 on or after the date of enactment). The new rules apply to participant loans taken out by September 23, 2020.
- Check with your employer as these changes are optional and can generally only be implemented after your employer formally agrees to amend the plan.
- Student loan payments, principal and interest are suspended through September 30, 2020, for all borrowers of federally owned loans.
- People who drop out of school because of the pandemic will not be required to return portions of any Pell Grants or federal loans they received.
- For teachers who are fulfilling requirements under the Teacher Loan Forgiveness Program or the TEACH Grant Program, this partial school year will count as a full year.
- Provided that financial hardship is a result of coronavirus, lenders of federally backed mortgages are required to postpone mortgage payments at the request of the borrower. The postponement must be granted for up to 180 days and extended for an additional period of up to 180 days at the request of the borrower.
- Foreclosures on federally backed mortgages are prohibited for 60 days starting March 18, 2020, and up to one year of forbearance is provided for borrowers of these mortgages who are facing financial hardship due to coronavirus.
- Eviction relief for renters whose landlords have mortgages backed by federal lenders cannot be evicted or charged any fees or penalties related to nonpayment of rent for 120 days after the CARES Act date of enactment.
Stimulus Checks and Unemployment Assistance
- All U.S. residents with adjusted gross income up to $75,000 ($150,000 joint filers) are eligible for a $1,200 ($2,400 joint filers) payment, as well as an additional $500 per child (under age 17).
- This amount is reduced by $5 for every $100 over the income limit above. The income phase out for eligibility is $99,000 for single filers and $198,000 for joint filers (with no children).
- There are no minimum income requirements to receive a stimulus check. Individuals with little or no income are eligible if they have a work-eligible Social Security number and are not a dependent of another taxpayer.
- The Pandemic Unemployment Assistance program was established for self-employed, independent contractors, and other workers who do not qualify for traditional unemployment benefits. The program is scheduled to expire December 31, 2020.
- The CARES Act provides a $600 per week per individual benefit for recipients of the temporary pandemic unemployment assistance for up to four months, in addition to the weekly unemployment benefit they receive from their state. Through December 31, 2020, the bill provides an additional 13 weeks of unemployment benefits for people who are still unemployed after exhausting their state benefits.
- The 2020 deadline to file your taxes has been extended to July 15, 2020, regardless of amount owed.
Our client services associates are available to answer questions about your current investment strategy and to help open new accounts for future emergency savings, college tuition, Roth IRAs and other financial needs. Give us a call at 800.258.3030, option 2.
Homestead Funds does not offer legal or tax advice. Consult an attorney or qualified tax professional if you have questions about your specific legal or tax situation.