The CARES Act: What Do You Need to Know?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law at the end of March, 2020. It was created to provide fast and direct economic assistance to people and businesses in the United States who have been affected by COVID-19.

Many people know about the CARES Act because it was responsible for providing the Economic Impact Payment of $1,200 to eligible taxpayers in the United States. But the CARES Act does much more than that.

If you’ve experienced a job loss, pay cut, falling revenue or other financial difficulties as a result of the coronavirus pandemic, there’s a good chance that the CARES Act can help. Even if you haven’t experienced a negative financial situation lately, it’s still important to understand what the CARES Act does – because along with delivering economic stimulus to the US economy as a whole, there are many parts of the act designed to benefit individuals.

Read on to understand more about how this important piece of legislation could help to support you, your family and your finances during what has been a difficult year for many.

1. Early Retirement Withdrawals and Loans

Unfortunately, unemployment numbers in the US have reached historic highs in 2020, with over 40 million applications for jobless benefits filed since the middle of March. If you’ve lost your job, or alternatively you’re a freelancer or small business owner seeing a reduction in income, you might be concerned about how to make ends meet – and possibly, you’re thinking about withdrawing money from your retirement savings.

Under normal circumstances, if you tap into your retirement account before the age of 59½, you’ll need to pay a 10% early withdrawal fee. This fee applies to both employer-sponsored retirement accounts like the 401(k) as well as individual accounts (IRAs). However, the CARES Act changes this. It gives you more flexibility to access your retirement funds, by eliminating the 10% early withdrawal penalty. This special tax treatment applies to the first $100,000 that you withdraw – double the previous early withdrawal maximum of $50,000, thanks to new rules under the CARES Act. This legislation has also removed the standard 20% federal tax withholding on distributions, so you get your entire withdrawal amount right away.

Depending on your employer, you may have the choice to take out funds as either a withdrawal or a loan. A loan means you’ll need to pay back what you’ve borrowed, but the CARES Act makes this easier to do by extending the pay-back period to six years and offering a one year reprieve on loan payments. A withdrawal on the other hand means you don’t have to pay back the funds, but you must demonstrate an immediate and heavy financial need such as healthcare or housing expenses – and you can be taxed on the money removed from your account.

Visit irs.gov for more information on withdrawing early from your retirement account and be sure to speak with an experienced retirement professional to learn how making a withdrawal could impact your specific situation.

2. Healthcare Expenses: HSAs and FSAs

Besides more forgiving policies around retirement savings withdrawals, the CARES Act also introduces some temporary flexibility for other types of accounts so that individuals can more easily access various funds to pay for critical expenses.

Many people in the US have a healthcare savings account (HSA) or a flexible savings account (FSA), which enables them to save for medical or other expenses with stronger tax advantages than a normal savings account would offer. Contributions to these accounts can come from an employer or from the individual.

Under the CARES Act, HSAs and FSAs are seeing a number of changes to support accountholders. For example, telehealth services are now included as pre-deductible expenses for HSAs, meaning the cost will be covered even if the set deductible hasn’t been reached. This policy aligns with social distancing guidelines; encouraging more people to make use of digital or telephone-based health services rather than visiting a medical professional in person.

FSA holders will be happy to learn that they are now entitled to make mid-year changes to expected funding and withdrawals. Whereas normally accountholders must predict expenses ahead of time and can only withdraw a certain amount of tax-advantaged funds, with the impact of COVID-19, more flexibility has been introduced by the IRS to help overcome the understandably unpredictable financial circumstances of 2020. More information about these changes is available from irs.gov.

3. Required Minimum Distribution Waivers

Retirement accounts such as the 401(k) or IRAs are subject to required minimum distributions, or RMDs. These rules mandate that accountholders withdraw a certain amount of money every year once they reach the age of 70½. RMD regulations are intended to ensure that retirement savings are fairly distributed and taxed, and not accumulated as inheritance.

The CARES Act offers temporary reprieve from RMDs, meaning accountholders are not required to take out any funds for the 2020 calendar year. If funds were distributed before the CARES Act was passed, accountholders can have these rolled back into their retirement savings, although some stipulations apply.

The reason behind pausing RMDs is that due to tough market conditions, many retirement accounts have seen a steep decline in 2020. The CARES Act rules on RMDs enable accountholders to keep more money in their account where it will be ready to benefit from improvements in the market. Of course if you still wish to withdraw from your retirement account in 2020 you may do so – but it’s not a requirement.

Speak with a retirement professional to understand more about what the new RMD rules mean for you and how to protect your retirement savings as the pandemic continues to affect the market. The IRS also has more details on the recent changes.

4. Charitable Donations

If you’re in the fortunate position to be able to make charitable donations in 2020, the CARES Act will support you to do so in a more tax-advantaged way. The law introduces an additional “above-the-line” deduction that allows for charitable donations of up to $300 per individual – meaning you can make a donation without itemizing where this money was given, and deduct that $300 from your taxable income. And, unlike many of the CARES Act provisions, this change will extend beyond 2020 alone.

Do be aware that the rules only apply to qualified charitable contributions, which usually means donating to a public charity rather than a private foundation. Some charities related to the COVID-19 pandemic may be affiliated with private organizations and therefore not applicable to the newly announced tax advantages. Most organizations will post their eligibility information online, so be sure to check how the new CARES Act rules might affect your donations.

Another small – but potentially impactful – change to charitable giving under the CARES Act is that individuals aged 59½ and above can now take a cash distribution from their IRA and give this to charity, thereby offsetting tax obligations on the funds. This advantaged charitable giving was previously available to people aged 70½ only, but now, the policy has been extended to younger accountholders as well.

Once again, you can find more information by visiting irs.gov or speaking with a financial professional about what all the changes in the CARES Act mean for you and your unique situation.