Tag: Loans

CARES Act Loans and Distributions: Long-Term Impact On Retirement Savings

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The Coronavirus Aid, Relief and Economic Security (CARES) Act allowed plan sponsors to relax loan and distribution rules in 2020, giving participants greater access to funds during the pandemic. These provisions were implemented to provide relief as many employees do not have adequate short-term savings. Employee Benefit Research Institute (EBRI) has found that only one in five families has at least three months of liquid savings. Layoffs, furloughs and other circumstances caused by the pandemic have left many workers struggling financially, so naturally, many looked to their retirement accounts for relief. While this access has been a useful tool for many financially strained Americans, such loans and withdrawals could inflict long-term damage on their progress toward a successful retirement.
 
Employers have an important role to play in helping to ensure that the flexibility offered by the CARES Act is used to alleviate workers’ short-term financial strains while minimizing the impact on their overall retirement strategy. Employers can do their part by carefully communicating how these withdrawals affect the amount that will be available to use in retirement and providing resources to assist in developing strategies to recuperate those funds.
 

CARES Act Allows for Loans and Coronavirus-Related Distributions

Under the CARES Act, plan sponsors had the option to allow participants to take advantage of increased loans with delayed repayments or coronavirus-related distributions (CRDs) without an early withdrawal penalty. Participants are allowed – but not required – to pay back the distributions within three years. During 2020, employers determined whether they would allow those provisions to be adopted within their plans, and if so, the amounts in which employees could take.
 
Research from the Plan Sponsor Council of America (PSCA) found in the 4th quarter of 2020, 54% of plan sponsors adopted the provision to allow CRDs while 31% permitted an increase to the plan loan limit. When offered both the option of loans and CRDs under the CARES provisions, 54% of participants selected a CRD which would not require a repayment.
 
According to Vanguard, as of the end of 2020, only 5.7% of the participants offered the option to withdraw assets initiated a CRD. While the percentage of participants who selected this option is relatively low and is less than initially projected, the average distribution represented 55% of the participant’s total balance with one in four distributions accounting for nearly 100% of their account balance. These participants may now face hardship in beginning their retirement savings accounts back at square one.
 

Communicate Long-Term Impact in Real Terms

Plan sponsors who did adopt these provisions should help participants understand that loans and distributions from defined contribution plans can negatively affect retirement savings and help them build a strategy around getting back to where they were. Participants have a lot on their minds today; in addition to navigating the pandemic and work and childcare routines, many are also wrestling with financial issues like healthcare bills or mortgage payments. Providing educational resources can help show participants how they can rebuild savings and get back on track for retirement – including tangible examples of repayment schedules.
 
The Employee Benefit Research Institute (EBRI) created projections to show the impact of taking CRDs on employees’ retirement balances for various age groups. These projections assume that employees take the full $100,000 distribution (or their full vested amount if it is less than $100,000). The projections show how much an employee’s retirement account balance at age 65 is projected to decrease as a multiple of the employee’s projected annual compensation at age 65.
 
In one scenario projected by the EBRI, employees take the full CRD and pay it back over three years. EBRI found that doing so caused account balances upon reaching age 65 to decrease a median of 2.3 percent across all age groups. But the negative impact was more than twice as significant (5.8 percent) for employees who took the distribution between the ages 60 and 64.
 
In another scenario, employees take the full CRD but do not pay it back. EBRI found that doing so caused account balances upon reaching age 65 to decrease a median of 20 percent for all age groups. But the negative impact was a staggering 45 percent for employees between the ages of 60 and 64.
 

Insight: Help Participants See the Impact

Based on the PSCA research, as of November 2020, only 38% of organizations had communicated the impact of these loans and distributions to plan participants. Plan sponsors can help their employees by providing straightforward information about how accessing the funds now can affect their financial futures. This information should include reminding participants that the repayment of these CRDs within the three-year time period will allow participants to avoid paying income taxes on the related distributions.
 
Although participants may not have the resources to currently increase their deferral rate to help make up the funds distributed as the pandemic is ongoing, plan sponsors should continue to encourage those who took CRDs to set a plan to increase their contributions in the future. Once financially stable, these participants can benefit from putting a plan in action to increase their contributions to make up for the funds and related investment earnings lost during this time period.

Why This Small Business Advisor Gives The Small Business Loan Program a C- Grade

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Watch the Interview

David Dodson, small business advisor and professor of management at Stanford University, joins “Squawk Alley” to discuss the federal small business loan program as Congress works to approve more funds. Senate Democrats on Thursday blocked a Republican push to unanimously pass a bill to put $250 billion more into a loan program for small businesses devastated by the coronavirus pandemic. With only a few senators in the Capitol, Senate Majority Leader Mitch McConnell tried to approve the measure by a unanimous vote. Sen. Ben Cardin, D-Md., objected to the request, stalling the legislation. Speaking on the Senate floor, McConnell said he was not “talking about changing any policy language” the parties negotiated last month as part of an unprecedented $2 trillion emergency spending package. He urged Democrats not to “block emergency aid you do not even oppose just because you want something more” — tweaks to the small business aid program and more emergency funding for hospitals and states, a proposal Democratic leaders outlined Wednesday. After Cardin rejected the measure, he called McConnell’s move to pass the funding a “political stunt.” He pushed for provisions including money for Small Business Administration disaster assistance grants so that people who do not already have a banking relationship can receive the aid.

CNBC Squawk Alley. “Why This Small Business Advisor Gives The Small Business Loan Program a C- Grade” YouTube, uploaded by CNBC Television, 9 April 2020, https://www.youtube.com/watch?v=aitQhlnrIh4, All rights reserved.

Take Advantage of SBA Loans and Payroll Tax Incentives

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Background

In light of the novel coronavirus (COVID-19) global pandemic, many small-to-medium sized businesses are struggling to manage revenue losses amid prolonged economic uncertainty.  

To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cashflow as well as tax savings.

Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.
 

SBA Paycheck Protection Program

This $350 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.

What can the loan be used for?
The loan can cover costs including payroll, continuation of health care benefits, employee compensation (excludes compensation in excess of $100,000 on an annual basis), mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred before the covered period.

Who is eligible for the program? 
To qualify for the program, businesses must have either fewer than 500 employees (including full time, part time and “other” employees), meet the SBA’s size standards, or have less than $15 million of tangible net worth and less than $5 million of average net income in the last 2 years. There are some special eligibility rules for businesses in the hospitality and dining industries.

How much can a business borrow?
The maximum amount for these loans is two times the average total monthly payroll costs, or up to $10 million. The interest rate may not exceed 4%. Business can also defer payment of the principal, interest and fees for six months to one year.

Is there loan forgiveness?
Yes, provided your business meets certain conditions. Your business will be eligible to apply for loan forgiveness equal to the amount you spent during an eight-week period after the loan closing date on:​ 

  • Payroll costs
  • Interest on mortgages
  • Payments of rent
  • Utility payments  

Principal payments of mortgage payments will not be eligible for forgiveness.

How do you apply?
Applications and underwriting are handled by SBA-approved banks. While documentation requirements will vary between institutions, we would expect them to include the following:

  • Current personal financial statement
  • Latest available personal tax return
  • Latest available business tax return
  • Latest available internal 2019 YE financials
  • YTD internal 2020 financials
  • Spreadsheet detailing the following:
    • List of all full-time employees with eight weeks salary + payroll taxes
    • Cost of two months of rent with copies of leases
    • Cost of two months of mortgage interest with copy of loan payments
    • Cost of two months of utility costs with copy of utility payments

What is required to be eligible?
Borrowers will need to include a Good-Faith Certification that:

  • The loan is needed to continue operations during the COVID-19 emergency.
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
  • The applicant does not have any other application pending under this program for the same purpose.
  • From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.

Are there any other considerations to be aware of?

  • Given these very limited requirements for borrowers, we may see additional guidance from the SBA on how banks should be underwriting these loans.
  • Additionally, the CARES Act does not appear to have overridden the SBA’s “affiliation” rules. Entities are considered “affiliates” when they are controlled by or under common control of another entity. This classification generally includes private equity owners.  Business cannot exceed the size thresholds for either the primary industry of the business alone, or the industry of the business and its affiliates, whichever is greater. For groups of affiliates that operate in different industries—a typical case for private equity portfolio companies—industry code is based on the primary income producing entity. However, there is some ambiguity in the text of the CARES Act, so additional guidance may be forthcoming.

Employee Retention Credit

The CARES Act provides eligible employers with a refundable credit against payroll tax liability.

How much does the credit cover?
The credit is equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits).

Who is eligible for the credit?
Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:

  • Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.
  • A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.

For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.

Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.

Delay of Employer Payroll Taxes

The CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.

When are the deferred payments due?
The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.

Who is eligible for the deferral?
All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.

How We Can Help

Small to medium-sized businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity. 

In the immediate term, we can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.

In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. We can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid.