March 28, 2020

CARES Act

The President has just signed yesterday a roughly $2.2 trillion coronavirus response bill intended to speed relief across the American economy. Forgive our attempt at brevity since the original text of the Senate bill was 883 pages, and the final law was 271 pages. Read more here. Therefore, pardon us if we have misinterpreted some of these very complex provisions. We have been working non-stop on your behalf in our attempt to pro-actively plan your financial, tax, and investment affairs as we maneuver through this unprecedented set of circumstances. As Steve Estrin and I (the original members of the firm) have said so many times, we thought we would finish our careers without witnessing this once-in-a-century event. Perhaps, we have lived too long!? Nonetheless, we are so excited for the future, no matter how uncertain it may seem to many of us.

There are six main groups that would see the widest-reaching impacts:

Individuals Estimated To Total $500 Billion

The bill includes several elements aimed at helping keep people engaged in the economy. That means direct cash for many families plus expanded unemployment benefits, new rules for compliance matters, such as filing your income tax returns, making your 1st quarter estimated income taxes, as well as making retirement contributions.

Cash payments: Most individuals earning less than $75,000 can expect a one-time cash payment of $1,200. Married couples would each receive a check and families would get $500 per child. That means a family of four earning less than $150,000 can expect $3,400.

The checks start to phase down after that and disappear completely for individuals making more than $99,000 and couples making more than $198,000.

The payments are based on your 2019 return, if it has been filed, or your 2018 return if it has not been filed. [Note: Our Tax Department will be working directly with you for the best tax return filing strategy.]

Loosens Rules on Retirement Accounts: Older Americans that are subject to mandatory required minimum distributions (“RMD”) from their retirement accounts (i.e., defined contribution plans (such as 401(k) plans)) and IRAs would be able to keep their capital invested instead of being forced to cash out to draw on that capital without penalty, which would be suspended for 2020, including 2019 distributions that would be payable by April 1, 2020 (next Wednesday), because the account owner turned 70 ½ in 2019.

Similarly, the CARES Act also waives the 10% penalty (but not ordinary income taxes) on coronavirus-related early distributions from 401(k)s and IRAs, which applies to distributions made at any time during 2020, by an individual (or whose family) is infected with the coronavirus or who is economically harmed by the coronavirus.. Distributions are limited to $100,000, and may be re-contributed to the plan or IRA. Employers are permitted to amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted to allow plan loans up to $100,000 and repayment of existing plan loans is extended for employees who are affected by the coronavirus.

Extra unemployment payments: The bill makes major changes to unemployment assistance, increasing the benefits and broadening who is eligible. States will still continue to pay unemployment to people who qualify. That amount varies state by state. So does the amount of time people are allowed to claim it. These provisions expire on December 31, 2020.

This bill adds $600 per week from the federal government on top of whatever base amount a worker receives from the state. That boosted payment will last for four months.

For example, if an out-of-work person is receiving the national average of about $340 per week, under the new federal program their take-home pay will be $940.

The legislation also adds 13 weeks of additional unemployment insurance. People nearing the maximum number of weeks allowed by their state would get an extension. New filers would also be allowed to collect the benefits for the longer period.

Gig workers and freelancers: Typically, self-employed people, freelancers and contractors can’t apply for unemployment. This bill creates a new, temporary Pandemic Unemployment Assistance program through the end of this year to help people who lose work as a direct result of the public health emergency.

Student loans: Employers can provide up to $5,250 in tax-free student loan repayment benefits. That means an employer could contribute to loan payments and workers wouldn’t have to include that money as income.

Insurance coverage: The bill requires all private insurance plans to cover COVID-19 treatments and vaccine and makes all coronavirus tests free.

Small Business Loans Estimated To Total $349 Billion

The main features for small businesses are emergency grants and a forgivable loan program for companies with 500 or fewer employees. There are also changes to rules for expenses and deductions meant to make it easier for companies to keep employees on the payroll and stay open in the near-term.

Emergency grants: The bill provides $10 billion for grants of up to $10,000 to provide emergency funds for small businesses to cover immediate operating costs.

Forgivable loans: There is $350 billion allocated for the Small Business Administration to provide loans of up to $10 million per business. Any portion of that loan used to maintain payroll, keep workers on the books or pay for rent, mortgage (interest portion) and existing debt could be forgiven, provided workers stay employed through the end of June.

Relief for existing loans: There is $17 billion to cover six months of payments for small businesses already using SBA loans.

Big Business Estimated To Total $500 Billion

The bill sets aside roughly $500 billion in loans and other money for big corporations. These companies will have to pay the government back and will be subject to public disclosures and other requirements.

Airlines: About $58 billion is allocated to help airlines stay open. One portion of that money is set aside to help cover employee wages, salaries and benefits divided up as up to $25 billion for passenger air carriers, up to $4 billion for cargo air carriers, and up to $3 billion for airline contractors.

Stock buyback ban: Any company receiving a loan under the program is barred from making stock buybacks for the term of the loan plus one year.

Reporting requirements: All loans, their terms and any investments or other assistance provided by the government must be publicly disclosed.

Oversight: The bill creates a special inspector general to oversee pandemic recovery. That person, along with a special committee, would provide oversight of all loans and other uses of taxpayer dollars.

No benefit for Trump: The president, vice president, members of the Cabinet and members of Congress are barred from benefiting from the money carved out for corporations. That also extends to the “the spouse, child, son-in-law or daughter-in-law.”

All businesses: The bill establishes a fully refundable tax credit for businesses of all size that are closed or distressed to help them keep workers on the payroll. The goal is to get those employees hired back or put on paid furlough to make sure they have jobs to return. The credit is good against the employer portion of FICA and Medicare taxes paid. The credit is limited to the first $10k of wages per employee (so $765 per employee), up to $5,000 (We assume per entity per quarter?). The 100 or less employee entity must be able to show a 50% decrease in revenue.

For employers with more than 100 full-time employees, the credit is for wages paid to employees when they are not providing services because of the coronavirus. Eligible employers with 100 or fewer full-time employees could use the deduction even if they aren’t closed.

Public Health Estimated To Total $224 Billion

Lawmakers want to supplement community and private health systems to help meet the influx of new patients.

Hospitals: There is $100 billion for hospitals responding to the coronavirus.

Community health centers: The bill provides $1.32 billion in immediate additional funding for community centers that provide health care services for roughly 28 million people.

Drug access: There is $11 billion for diagnostics, treatments and vaccines. The bill also includes $80 million for the Food and Drug Administration to prioritize and expedite approval of new drugs.

Veterans’ health care: There is $20 billion set aside for veterans.

Telehealth: The bill reauthorizes a critical telehealth program to extend the reach of virtual doctors’ appointments. [Note: My wife, Connie, took advantage of this very feature this morning, and a doctor on our Blue Cross Blue Shield of Texas Medical Plan (who knows where he was located) called back, conducted the examination and diagnosis of seasonal allergies over the phone with Face Time and, thankfully, no Coronavirus, so he prescribed a prescription – and get this – all for $25 as a co-pay, and she did not have to leave our outdoor lanai!?] This is the new normal!

Medicine and supplies: The bill gives $16 billion to the Strategic National Stockpile to increase availability of equipment, including ventilators and masks. It also boosts hiring for vital health care jobs during the public health crisis and speeds the development of a vaccine, treatments and faster diagnostic.

Safety Net Estimated To Total $42 Billion

Child nutrition: There is $8.8 billion to give schools more flexibility to provide meals for students.

Food stamps: $15.5 billion is going to the Supplemental Nutrition Assistance Program, also known as SNAP. The money will help cover the expected cost of new applications to the program as a result of the coronavirus.

Food banks: There is $450 million more for food banks and other community food distribution programs.

State And Local Governments Estimated To Total $339.8 Billion

The legislation designates $339.8 billion for programs that will go to state and local governments. It is divided up to put $274 billion toward specific COVID-19 response efforts, including $150 billion in direct aid for those state and local governments running out of cash due to high numbers of cases.

It also includes $5 billion for Community Development Block Grants, $13 billion for K-12 schools, $14 billion for higher education and $5.3 billion for programs for children and families, including immediate assistance to child care centers.

Education And Other Estimated To Total $43.7 Billion

The bill includes relief for college students and graduates with outstanding federal student debt.

Temporary student loan relief: All loan and interest payments would be deferred through Sept. 30 without penalty to the borrower for all federally owned student loans.

Work study funds: It allows schools to turn unused work-study funds into supplemental grants and continue paying work study wages while schools are suspended.

Students who are forced to drop out: Students who drop out of school as a result of the coronavirus wouldn’t have that time away from school deducted from their lifetime limits on subsidized loan and Pell grant eligibility. Those students would also not be asked to pay back any grants or other aid they’ve already received.

Other programs: There is a very long list of other areas receiving funding including arts programs, universities and other institutions.

Impact On The Economy And Stock Market

We know a lot more about COVID-19 than we did a few weeks ago; but there remain questions that are unanswerable at this stage. We don’t know how much worse this gets before it starts to get better. We don’t know how severe the economic impact will be as a result of containment efforts; or how long we will stay in this level of containment. Finally, we don’t know when markets will find their footing—especially given that traditional technical, sentiment and valuation metrics are less relevant in a pandemic-driven bear market environment.

If the virus wasn’t enough, we are also in the midst of a fire sale in the bond market. There was a global rush to cash. Outside of short-term treasuries, everything was for sale last week at discounted prices. Leveraged investors such as hedge funds, and those using margin, were forced to liquidate as prices fell. Portfolio managers had to sell to meet redemptions from institutional and individual investors. They sold what they could—those investments that were liquid enough to get a bid—including long-term treasuries. Much of the selling was indiscriminate, driven by the demand for cash.

Meanwhile, over in stock market land, we are in the midst of the swiftest move from all-time highs (February 19 in the case of the S&P 500) to a bear market in history—besting the move in 1929. The rout has been exacerbated by the blow-out in credit spreads in both the investment grade and high yield corporate bond market—with the crash in oil prices and attendant impact on the beleaguered energy sector—yet another brush fire. We in Houston are especially impacted.
Some good news:

  • There are encouraging health trends regarding COVID-19 coming out of Taiwan, South Korea, China, and perhaps Italy (early indications in Italy).
  • China’s economy is recovering, with manufacturing likely to hit 90% utilization by the end of April.
  • GDP will likely begin to rise in the US beginning in 3Q20 as the COVID-19 threat abates and governments remove restrictions.
  • A recovery trend is likely for 2021. The primary threat to this recovery in the industrial sector is a lack of recovery in oil prices. Unprofitable oil pricing and the negative impact that has on the energy industry can keep industrial production in total relatively depressed and inhibit GDP’s growth.

The magnitude of the fiscal stimulus package discussed above is nothing short of impressive, and the experience of 2009 shows that it will make a difference. The scope of the monetary policy is even more impressive.

Don’t lose faith in the financial systems or our dysfunctional government as the number of coronavirus cases accelerate over the next few weeks. Fear is natural but should not be paralyzing. Hopefully, by the fourth quarter of 2020 we will begin to see good health return to the American public and their financial sectors. Bookmark this statement and let’s revisit as we usher in 2021!?

One final note, we wish to thank our outside Chairman of the Board, Randy Waesche, CFP, for his tireless efforts on our firm’s behalf for the benefit and protection of you, our valued client! Once again, he accepted this appointment on behalf of our firm, and specifically Steve, Darryl and Rick, on February 29, 2020. His timing was impeccable! Randy, thank you, and our lives are enriched by our friendship!

As always,
We are here for you!

Richard J. Alphonso
Chief Executive Officer