How Much Life Insurance Should You Have? Top 8 Factors

how much life insurance do you need

When we are assisting clients in building their personal financial plan, inevitably one of the most frequent questions that comes up is: “How much life insurance should I have?”  It's an important question to ask because if something unexpected were to ever happen to you or your spouse, it could put your family in a very difficult financial situation.  To help mitigate this risk, people buy life insurance to guard against this type of unfortunate event but it’s important to know how much life insurance protection you should have. If you have too little, the coverage might not be enough to meet your family’s financial needs. If you have too much, you might be wasting money on insurance that you don’t need. 

In this article we're going to go over the top 8 variables that factor into how much life insurance you should have, as well as, what type of insurance might make sense for you. 

#1:  Amount of Debt

First, you should tally up the total value of all of your outstanding debt. 

• Mortgage

• Student Loans

• HELOC

• Credit Cards

• Car Loans

• Any other debt…………..

If you have dependents and something were to happen to you, the goal is to minimize the future annual expenses for your family.  If you are married and you are used to having two incomes in the household to pay the mortgage, student loans, and car loans, if one spouse passes away, the family loses that income stream and it could be very difficult to meet the monthly payment on the debt with only one income.  The life insurance would payout at the death of the insured spouse and those proceeds can be used to wipe out all of the debt which in turn reduces the monthly expense burden on the family. 

#2: Income Level of Each Spouse

If you are married, the income level of each spouse will factor into how much life insurance each spouse should have.  If spouse 1 makes $200K per year and spouse 2 makes $40K per year, typically you will need more insurance on spouse 1 than spouse 2.  If Spouse 1 passes away, over the next 5 years, that’s $1 million in income that would need to potentially be replaced ($200K x 5 Years). However, if spouse 2 passes away, there would only need to be $200K to cover the next 5 years of income ($40K x 5 years). 

A common mistake that married couples make is they blindly go in and purchase two insurance policies with the same death benefit without taking the different income levels into account.  For possibly the same combined premium amount, in many but not all cases, couples can be better served by shifting more of the insurance coverage to the spouse with the higher income. 

#3:  Future College Expenses

If you have children and you expect those children to attend college, if you do not expect to receive large amounts of need based financial aid, it's important to factor in future college expenses into the amount of the insurance coverage.   If you have 3 children and you planned on paying for their first 4 years of college, assuming college tuition with room and board is $25,000 per year, that’s $100,000 per child, multiplied by 3, for a grand total of $300,000 in anticipated college costs. 

#4: Household Expenses

Everyone has a different lifestyle.  One couple that has a combined income of $300,000 may need $250,000 to support household expenses if one of the spouses were to pass away.   But another couple making the same $300,000 per year may only need $150,000 per year in income to support the household if one of the spouses passes away. You have to determine how your annual expenses would be impacted based on the untimely death of each spouse. 

#5:  Outside Savings

The amount of wealth that you have already accumulated absolutely factors into the amount of insurance that you may need.  For example, if you sold your business and have $2 million in cash and non-retirement investment accounts, you may essentially be self-insured, meaning if something happened to you, you have accumulated enough savings to meet all of your family’s future financial needs without the need for additional insurance coverage. 

However, if you and your spouse are both below the age of 50, have 2 children, and all of your wealth is tied up in 401(k)’s or retirement accounts, if you or your spouse were to pass away, the surviving spouse would have to withdrawal that money from the retirement accounts to meet expenses and pay tax on those distributions. So that $200,000 in their 401(K) may only be $150,000 after the taxes are paid but it depending on your tax bracket.   By comparison, personal life insurance policies that you pay for out of pocket, the insurance proceeds are received tax free when paid to your beneficiaries. 

So it’s not just a question of how much you have accumulated but also how accessible are those assets to your beneficiaries if they need to use those assets to supplement their income. 

#6:  Retirement Savings

You also have to consider the impact of an untimely death of a spouse on your retirement projections.  If you or your spouse are covered by an employer sponsored retirement plan, like a 401(k) or 403(b), your retirement projections probably have you both making those regular annual contributions up until your retirement date.  If one spouse passes away, those retirement contributions that were supposed to be there, no longer will be, which could force the surviving spouse to work longer than they wanted too. 

You have to pay close attention to individuals that have pensions.  Some pensions require the employee to turn on their pension benefit to reserve the survivor benefit for their spouse.  If the employee passes away prior to their pension start date, the generous pension benefit which the family was depending on could be replaced by a much lower lump sum death benefit.   In addition, retirees that elect a pension benefit with no survivor benefits to their spouse will sometimes use life insurance to cover the risk that they pass away and the pension stops within the early years of retirement. 

#7:  Adult Children with Disabilities

For families that have adult children with disabilities, it's not uncommon for the parents to be providing some form of continued financial support for their disabled child for the duration of their adulthood.  If the parents were to pass away, the concern is that there has to be enough assets inherited by the child to provide them with support for the remainder of their life.  Parents will often set up a Special Needs Trust to serve as the beneficiary of these life insurance policies so if the policies do payout it does not jeopardize the Social Security, Medicaid, Medicare or other government assistance that the disabled child may be receiving. 

#8:  Estate Plan

For some clients, it’s part of their estate plan that no matter what happens they want to know that $500,000 will go to each child, their favorite charity, to a trust for their grandchildren, or for clients with larger estates to pay the anticipated estate tax.  To guarantee that those amounts will be available to meet their estate wishes, individuals can purchase permanent life insurance that will payout at the death of the insured. 

Case Study

Let's run through a simple example given the following fact set: 

Spouse 1 Income:  $200,000  (Age 30)

Spouse 2 Income;  $50,000   (Age 31)

Children:  Susan Age 4 and Rebecca Age 2

Mortgage:  $250,000

Student Loans: $20,000 

The couple above has the college savings goal to pay for the first 4 years of the kid’s college expenses which is anticipated to be $25,000 per year. 

Total Debt:  $270,000

Total Estimated Future College Expense: $200,000 ($25K per year for each child) 

From an income replacement standpoint, we would be looking to provide this family with a minimum of 5 years of income replacement.  For the coverage on Spouse 1 that would be: 

$200K Annual Income x 5 Years = $1M

Total Debt and College Costs =   $470K

Total Insurance Coverage on Spouse 1:  $1.5M (round up) 

For the coverage on Spouse 2 that calculation would be: $50K Annual Income x 5 Years = $250KTotal Debt & College Costs = $470KTotal Insurance Coverage on Spouse 2 = $750K (round up) 

How Much Does Insurance Cost?

In general, term insurance is cheap and permanent insurance is more expensive.  For 90% of the individuals that we work with for their financial plan, term insurance typically makes the most sense.  To give you an idea, a $1M 30 Year Term policy with William Penn Insurance Company, for an individual with the following fact set: 

• Age 30

• Gender: Male

• Resident of New York

• Non-Smoker

• Preferred Health Class

The monthly premium would only be $70.46 per month as of July 2020. 

New York Residents: We Can Help

Michael Ruger & Rob Mangold are independent insurance agents which means we are not tied to a single insurance company. If you are a resident of New York, we can consult with you, help you to determine the amount of insurance that you need, evaluate you current life insurance coverage, and run free quotes for you across the major life insurance carriers in NY to determine the most appropriate carrier for your insurance policy. Contact Us

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The New PPP Loan Forgiveness Application & Early Submission

It just keeps getting better for small business owners.  On June 17, 2020, the SBA released the updated PPP Forgiveness Application.   In addition to making the forgiveness application easier to complete, the new application also provided additional guidance on a number of questions that arose when the SBA extended the forgiveness period to 24 weeks. 

But it gets better. On June 22nd, the SBA issued additional guidance allowing borrowers to apply for forgiveness prior to the end of the 8 week or 24 week covered period if the borrowers had already spent their full PPP loan amount. 

With so much that has happened since the Paycheck Protection Program was first launched. Here is a quick recap of the events leading up to the release of the new PPP Forgiveness Application and the new guidance: 

March 27, 2020:  Congress passed the CARES Act which created the PPP Loan Program

April 2020:  The SBA opens the window for companies to access the PPP Loans

May 15, 2020:  The SBA released the first version of the PPP Loan Forgiveness Application

June 5, 2020:  Congress passed the PPP Flexibility Act

• Extended Covered Period to 24 Weeks

• Reduced payroll cost requirement from 75% to 60%

• Extended rehire safe harbor from June 30th to December 31st

June 17, 2020:  SBA releases the updated PPP Forgiveness Application

June 22, 2020: SBA allows companies to apply for forgiveness prior to the end of the covered period 

In this article we are going to address: 

• How to complete the new PPP Forgiveness Application

• The EZ Forgiveness Application vs the Long Form PPP Forgiveness Application

• Which companies are eligible to submit the PPP EZ Forgiveness Application

• The new max comp limits of $20,833 and $46,154

• Ability to apply for forgiveness prior to the end of the covered period

PPP EZ Forgiveness Application – Form 3508EZ

Instead of releasing just one forgiveness application, the SBA actually released two separate PPP Forgiveness applications: 

• PPP Loan Forgiveness EZ - Form 3508EZ

• PPP Loan Forgiveness Revised – Form 3508

The good news is both applications are much shorter than the initial 12 page Forgiveness Application that was released on May 15th, but making it even better, we now also have an EZ application which will make the Paycheck Protection Program Forgiveness Application process even easier for many companies. The EZ application is only 3 pages long. giving companies access to a shorter forgiveness application made sense to us because the PPP loan amount was calculated based on 10 weeks of payroll and with the extension of the covered period to 24 weeks, companies now have 24 weeks of payroll to cover a loan amount based on 10 weeks. The result, most companies will most likely be able to reach the full PPP forgiveness amount on Payroll Costs alone without having to take into account rent, utilities, and other qualified expenses. 

Who Is Eligible To Use The PPP EZ Forgiveness Application? 

Companies will only be able to utilize the PPP EZ Forgiveness Application if they satisfy one of the following three criteria. I will give you the short and sweet version first followed by the long technical version of the criteria.  Short and sweet: 

• You have no employees (Sole Proprietors or Owner Only Entities)

• You did not reduce employee HEADCOUNT (FTE’s) and did not reduce WAGES by more than 25% for employees making less than $100,000 in 2019 during the covered period compared to January 1, 2020 – March 31, 2020

• You did not reduce employee WAGES by more than 25% for employees making less than $100,000 in 2019 but you reduced the number of FTE’s during the covered period. However, the reduction in FTE’s was because CDC, OSHA, or other government agencies limited the capacity that the business could operate at during the covered period.

Here is the long technical version of the three criteria: 

• The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of the average monthly payroll in the PPP Application Form (SBA Form 2483).

• The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period compared to January 1, 2020 and March 31, 2020 AND The borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the covered period.

• The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period compared to January 1, 2020 – March 31, 2020 AND the borrower was unable to operate during the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidelines issued between March 1, 2020 and December 31, 2020 by the Secretary of Health, CDC, or OSHA, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Again, you just have to be able to satisfy ONE of the three criteria listed above. You do not need to satisfy all three. 

Reduction In Wages of Employees

Per the criteria mentioned above, if you reduced wages by more than 25% during the covered period for employees that made under $100,000 in 2019, you would not be able to complete the PPP EZ Application. 

At first look this seems pretty self-explanatory but it’s really not. If you just read that statement for what it is, it would lead you to look at just your year-end payroll report for 2019, determine who had an annual compensation of $100,000 or less, and then you would look to see if any of those employees had wage reductions of greater than 25% during the covered period. 

However, the way the guidance was written, it would imply that the $100,000 annualized compensation  applies on a per pay period basis, meaning if in ANY pay period in 2019, you paid an employee higher than a $100,000 annualized wage, that employee would not be subject to the wage reduction calculation.  It’s best to illustrate this in an example. 

Let’s say Jim is one of your employees and in 2019 you paid Jim a total of $80,000.  His $80,000 in compensation included $75,000 in base pay plus his $5,000 annual bonus that was paid to him in the final pay period in December.  Your payroll is run on a biweekly basis meaning for purposes of assessing the $100,000 annual compensation limit, any employee that received more than $3,846.15 in any bi-weekly pay period in 2019, would not be subject to the wage reduction calculation.  Since in Jim’s last paycheck of 2019, he received his regular bi-weekly wage of $2,884.15 plus his annual bonus of $5,000, his final paycheck in December was for $7,884.15.  Thus Jim is excluded from the wage reduction calculation and can be ignored for purposes of assessing whether or not you are eligible to complete the PPP EZ Forgiveness Application even though his total compensation for 2019 was under $100,000. 

Whether or not it was the SBA’s intention to assess the $100,000 limit in this manner, we cannot be 100% certain, but as of today, that’s how it reads. 

Now that we have all of that fun stuff out of the way, let’s get to completing the PPP Forgiveness EZ Application. For the purpose of this article we are focusing on the EZ application because given the new 24 week covered period, the new safe harbor exceptions, and the ability to submit the application early, we expect that a lot of companies will qualify to submit the EZ Forgiveness application. 

How To Complete the PPP Loan Forgiveness EZ Application

Here is what the first page of the PPP Loan Forgiveness Application Form 3508EZ looks like:  

SBA PPP Loan Forgiveness Application

There are no worksheets that need to be completed!! It’s just this page and a second page that has a bunch of lines that Borrower has to initial certifying that they followed all of the rules associated with the PPP Loan Program.  

Top Section: The top section of the form is just general information on your company, your PPP loan, and your payroll schedule. 

Covered Period:  If your PPP loan was issued prior to June 5th, you have the option to either select the 8 week covered period or 24 week covered period.   The covered period beings on the date that you received the PPP loan.  One might ask, why would anyone choose the 8 week covered period?  There are actually a few reasons. 

Reason 1: The company has already spent all of the PPP loan money within the 8 week period. 

Reason 2:  By electing the 24 week covered period, it also potentially creates a 24 week covered period for the FTE (full time equivalent employee) calculation and the 25% wage reduction calculation.  But the guidance that we just received from the SBA on June 22nd which allows companies to file the forgiveness application prior to the end of the covered period could change this.  The SBA issued guidance allowing companies to file the forgiveness application early but they did clarify what happens if the company receives full forgiveness but then reduces wages or FTE’s prior the end of the full 24 week covered period.  We are flying blind right now until we get more guidance from the SBA on this. 

For companies that have not spent 100% of their PPP loan amount, it think this new guidance creates a wait and see approach, as to whether the company should select the 8 week covered period or select the 24 week covered period with the ability to apply for forgiveness early. 

For companies that have been able to spend 80%  to 90% of their PPP loan during the 8 week covered period, that were planning on reducing employees or wages after the covered period was complete, depending on the guidance that the SBA issues, it may be advantageous for those companies to stick with the 8 week period, as opposed to being subject to the 24 week covered period calculations that could reduce the forgiveness amount. 

The only other downside to selecting the 8 week period is the compensation limit for each owner and each employee is capped at a lower level compared to the 24 week covered period.  We will cover this when we get to the Payroll Cost portion of the forgiveness application. 

What is the “End Date” of your Covered Period?

With this change, I’m not really sure what is considered the new “end date” for the Covered Period.  Being able to apply for forgiveness prior to the end of the covered period makes the end date of the covered period seem irrelevant.   Maybe the new end date of the covered period is the day that you submit the forgiveness application.  That makes more sense to me because that would be the time period that you would be submitting payroll data for and the nonpayroll expenses that have either been paid or incurred, but it’s not clear at this point. 

Alternative Payroll Covered Period:  As mentioned above, the covered period begins the day the PPP loan hit your business checking account.  However, companies are allowed to elect to begin their covered period at the beginning of their next payroll period following the receipt of the PPP Loan. 

Example: Company XYZ has a bi-weekly payroll schedule.  They receive their PPP loan on April 26th in the middle of one of their payroll periods.  The company could voluntarily elect an alternative payroll covered period beginning on May 5th with would be the first day of the next payroll period.  This could make the calculations a little easier since the payroll dates will match up with a covered period. 

The extension of the covered period to 24 weeks and the ability to file for forgiveness early may render the Payroll Covered Period feature irrelevant for many companies.  It was more relevant when companies had to make sure they could fit in their 8 weeks of payroll into their 8 week covered period to maximize their forgiveness amount. 

Line 1: Payroll Costs: The new PPP Forgiveness Application came with different compensation limits for owner-employees and regular employees. 

Sole Proprietors & Owner Only Entities

If you are a sole proprietor or owner only entity, the Payroll Cost calculation is going to be very easy.  For each owner, the payroll cost is the LESSER OF $20,833 or 2.5 months of compensation from 2019.  If you are a sole proprietor that made more than $100,000 in 2019, you can just enter $20,833 on that line and move on.  For companies with multiple owners with no employees, you would just total up the compensation amounts with the cap for each owner and enter it on that line. 

For Companies With Employees

If your company has employees and satisfies one of the three criteria making you eligible to complete the PPP Forgiveness EZ Application, using your own personal excel spreadsheet, you can total up the Payroll Costs for the owners and employees as follows: 

Different Max Compensation Limits For Owner-Employees & Employees

The new forgiveness application provided updated guidance on the maximum compensation allowed for both owners and employees during the covered period.  Under the old 8 week covered period, compensation was capped at $15,385 for both owners and employees.   With the new 24 week covered period, compensation is capped at the following: 

• Owner-employees: $20,833

• Employees: $46,154

The math makes sense because it’s the $100,000 compensation cap, dividend by 52 weeks, multiplied by a 24 week forgiveness period.  Unfortunately for owners, the cap was only increased to $20,833 and there is an additional restriction.  The compensation cap for owner-employees will be the LESSER OF: 

• $20,833; or

• 5 months of the owners 2019 compensation

But also using the same math, it would seem prudent that the $46,154 compensation cap for each employee would be reduced if you submit your PPP Forgiveness application prior to the end of the covered period.  Example: If you file your forgiveness application after 15 weeks it would seem prudent that each employee's compensation would be limited to $28,846 which is the $100,000 cap, divided by 52 weeks, multiplied by 15 weeks, but the SBA has yet to issue guidance on this. 

So column 1 of your excel spreadsheet is compensation paid during the covered period to owner-employees and employees with these compensation caps imposed. 

For Employees: Health & Retirement Contributions Are In Addition To Comp Limit

The next two columns in your excel spreadsheet should be “Health Insurance Costs” and “Employer Retirement Contributions”. 

For employees, the maximum compensation for any single non-owner employee during the 24 week covered period is $46,154, but that cap just applies to their compensation.  In addition to the $46,154 cap, the company can also include the following amounts in “Payroll Costs” for each employee: 

• Employer contributions for employee health insurance

• Employer contributions to employee retirement plans

For sole proprietors and partners, these amounts are not counted in addition to the $20,833 for owner employees. It’s not 100% clear how retirement contributions will work for owner-employees of S-corp and C-corp, but as of today, I would guess that they are going to be limited as well to the $20,833 for compensation, health insurance, and employer contributions to retirement plans. Guidance needed from the SBA on this. 

But again, we expect this to be irrelevant for many companies because most companies will be able to meet the full forgiveness amount on just the 24 weeks of payroll without having to factor in these other “Payroll Costs”. 

Total up all of those columns on your excel spreadsheet and you have reached your Line 1: Payroll Cost for the forgiveness application. 

Line 2:  Business Mortgage Interest:  Any interest payments on a covered mortgage obligation that was in place prior to February 15, 2020.  As of right now the definition is either PAID or INCURRED during the covered period. 

Line 3:  Rent or Lease Payments:  Payments of rent during the covered period for a lease that was in place prior to February 15, 2020.  Similar to mortgage interest, the cost can either be PAID or INCURRED during the covered period. 

Line 4:  Business Utility Payments:  The payment of utilities during the covered period include electricity, gas, water, transportation, telephone , and internet services that were in place prior to February 15, 2020. 

The Forgiveness Calculation

The rest of the form, Lines 5 – 8,  are fairly self explanatory.  You are adding up your total qualified costs in comparing that to your loan amount to determine the percentage of your forgiveness. 

Page 2: PPP Loan Forgiveness EZ Application

Page 2 of the PPP EZ Loan Application looks like this:

New PPP Forgiveness Application

The Borrower just has to initial on each line, sign the bottom of the form, and the application is complete.  The next step is to gather all the supporting documentation for the expenses that are listed on the PPP application and submit the forgiveness application with those supporting documents to your bank to formally begin the forgiveness process. the bank has 60 days from the date you submit your forgiveness application to either accept the application or reject it. 

The PPP Loan Forgiveness Application - Form 3508 ("Long Form")

If you don't qualify to submit the EZ Loan Forgiveness Application, then you would have to complete what I call the PPP Loan Forgiveness Long Form.  Now even though I call it the long form it's still shorter then the 12 page loan forgiveness application that was released by the SBA on May 15th.  The long form requires you to: 

• Complete the PPP Application Worksheets

• Run the FTE Calculations

• Run the Wage Reduction Calculation

• Determine if you satisfy any of the Safe Harbors

We will cover the long form in a separate article. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

SBA PPP Loan New 24 Week Covered Period & Additional Changes

ppp loan 24 week covered period

On June 3, 2020, Congress passed the Paycheck Protection Program (PPP) Flexibility Act which provided much needed relief to many businesses that were trying to qualify for full forgiveness of their SBA PPP Loan within the 8 week covered period.   This bill changed the Covered Period from 8 weeks to 24 weeks which will provide companies with more time to spend their PPP loan. But there were also other changes that were made to PPP program that we will cover in this article including: 

• Covered Period extended to 24 weeks

• Non-payroll cost increased from 25% to 40% of the loan amount

• Max Employee Comp may increase from $15,385 to $46,153

• Companies will have until December 31st to restore FTE’s (full time equivalents)

• Additional safe harbors for FTE calculation

• Companies can defer employer payroll taxes in addition to the PPP loan

• Loan duration extended from 2 years to 5 years

• New questions that the PPP Flexibility Act creates

New 24 Week Covered Period

This is probably the most important change that was made to the Paycheck Protection Program.  Companies will now have a 24 week covered period to spend their PPP loan Instead of the original 8 week period and qualify for full forgiveness of the loan amount. Since the SBA PPP Loans were calculated based on 10 weeks of payroll, companies were finding it challenging to spend the full loan amount within an 8 week period.  The new bill did not change the definition of qualified expenses. They are still: 

• Payroll

• Employee health insurance

• Employer contributions to retirement plans

• Mortgage interest

• Rent payments

• Utilities

But a lot of small businesses didn't have enough “non-payroll costs” within the 8 week period to reach the full amount of their PPP loan.  Also, many companies weren't able to hire their employees back until a few weeks into their Covered Period, so they did not have 8 weeks worth of payroll for many of their employees. 

Changing the Covered Period to 24 weeks will make qualifying for full forgiveness of the PPP loan very easy for many companies.  They now have a loan that was calculated based on 10 weeks of payroll but have 24 week of payroll to spend it on.  While there are still grey areas regarding some of the non-payroll costs associated with the PPP, the change to a 24 week Covered Period for most employers, will make them irrelevant because most employers will be able to spend the full loan amount on straight payroll costs. 

24 Week Covered Period Is Optional

The new PPP Flexibility Act does not require companies that received PPP loans to adopt a 24 week Covered Period. If the company received their PPP loan prior to the signing of the new PPP Flexibility Act, they can elect to continue to use their original 8 week Covered Period.  This is a favorable option for companies that have already spent their full PPP loan and have not had a reduction in employee headcount or reduced wages. 

However, companies that have spent the full PPP loan amount but have experienced a reduction in employee headcount or reduced wages, may want to consider adhering to the new 24 week covered period because it will provide them with more time to bring employees back and make the company eligible for full forgiveness of the loan. 

Ability To Apply For Forgiveness Early

This raises a question that we will hopefully get guidance on from the SBA or Treasury soon.  If a company is 15 weeks into their 24 week covered period, they have already spent the full PPP loan amount on qualified expenses, and they have restored FTE’s and wages, can they apply for forgiveness prior to the end of their 24 week period or do they have to wait? 

We don't know the answer to this one yet but a lot of companies are going to be asking this question. It seems like adding the ability to apply early for forgiveness would benefit both the borrower and the banks.  The banks do not want to be servicing a 1% loan any longer than they have to.  But allowing this also creates some issues.  All of the forgiveness calculations are based on a set Covered Period, if you have some companies applying for forgiveness after 12 weeks, others at 18 weeks, and some at 24 weeks, it could definitely complicate the forgiveness calculations. 

Non-Payroll Costs Increased from 25% to 40%

Prior to the passing of the PPP Flexibility Act, companies were required to spend at least 75% of the PPP loan amount on payroll cost in order to qualify for full forgiveness.  The new bill changed that.  Now companies only need to spend a minimum of 60% of the PPP loan amount on payroll costs to be eligible for full forgiveness. But arguably, not that many companies will need this now since they have 24 weeks of payroll costs to work with; but it adds some additional flexibility.

The 60% Cliff

While Congress may have loosened their restrictions on the minimum amount that needs to be used toward payroll costs it seems like it comes with a cliff.  While the old rules carried a 75% payroll cost threshold, it was assumed that for companies that fell short of the threshold, they would still qualify for partial forgiveness of the PPP loan amount.  Under this new 60% payroll threshold, as of today, it seems that if companies are unable to meet the 60% threshold, that none of the loan will qualify for forgiveness.  This will be an important feature to pay attention to for businesses like restaurants and bars that have been completely shut down and are only now starting to hire back employees.  Even with 24 weeks to work with, companies need to be aware of this possible 60% “all or none” forgiveness threshold that now seems to exist. Again, hopefully this is something that they will address in future guidance. 

Max Employee Comp $15,385 to $46,153

The PPP Flexibility Act did not change the $100,000 annual compensation limit for employees and owners. However, under the old 8 week covered period, each employee was limited to $15,385 in compensation during the covered period. 

$100,000 / 52 weeks x 8 weeks = $15,385 

Now that companies have a 24 week Covered Period, it would seem that the maximum compensation for each employee would naturally increase from $15,385 to $46,153. 

$100 / 52 weeks x 24 weeks = $46,153 

This has not been 100% confirmed yet but it will hopefully be addressed in the future guidance. 

You Cannot Increase Your PPP Loan Amount

This potential increase in the per employee compensation amount raises the question from employers, “Can I go back and ask for more money from the SBA for my PPP loan?” The short answer to that is “no”.  The PPP Flexibility Act did not change the calculation of the PPP loan amount, just other features of the program. They also specifically stated in the new bill, that the ability to apply for a PPP loan would not extend beyond June 30th.  As of today, there is a still about $100 Billion dollars allocated to the PPP loan program that is available to companies that have not yet applied for a PPP loan. 

For companies that would have qualified for the PPP loan but originally opted not to take it because they were completely shut down and doubted their ability to meet the 75% threshold of payroll within the 8 week Covered Period, this 24 week extension may now change their minds.  

FTE Rehired Date Extended to December 31, 2020

They also provided companies with a lot more time to bring back employees to avoid being penalized on the forgiveness amount of their loan.  Many companies are just now starting to open up but are by no means back to 100% of their staff and that was hurting them during the loan forgiveness process. Under the old rules, the FTE (full time equivalent) calculation was based on the last day of the borrower’s 8 week covered period but there was a safe harbor that stated as long as the employee headcount and wages were restored by June 30th, no FTE penalty would be assessed. 

Under the new PPP Flexibility Act, with a 24 week Covered Period, Employers will have more time to bring back employees and restore wages to their pre COVID-19 levels. The new act also extended the safe harbor FTE provision from June 30th to December 31, 2020, so companies will have until the end of the year to restore their employee headcount and wages to their February 15, 2020 level in order to avoid FTE penalties during the forgiveness process. 

Additional FTE Safe Harbors

The new bill enhanced some of the FTE safe harbor provisions. These safe harbors were in place to protect companies that had a reduction in their FTE’s but restored them by a specific date and based the calculations on alternative comparison periods. The new PPP Flexibility Act added to this list of FTE safe harbors which will now include: 

• There was an inability to rehire individuals who were employees of the eligible recipient on February 15th,

• There was an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or

• There was an inability to return to the same level of business activity as such business was operating at before February 15th due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Center for Disease Control and Prevention, or the Occupational Safety and Health Administration During the period beginning March 2020 and ending December 2020.

To further clarify this new safe harbor language, if you are a restaurant owner and for the remainder of the year you are required to operate at a limited capacity due to restrictions set forth by these public health organizations, you can access these safe harbors, and your loan forgiveness amount will not be reduced due to the inability to restore your FTE headcount. 

Companies Can Defer Employer Payroll Taxes & Get PPP Forgiveness

One of the relief provisions within the CARES Act was providing companies with the option to defer their employer’s 6.2% share of Social Security Taxes until 2021 and 2022.  This provision allowed companies to avoid having to pay those taxes now and they had to repay those amounts 50% in 2021 and 50% in 2022.   The taxes are still due but the payments are delayed so it's essentially an interest free loan for companies. 

Under the old PPP provisions, companies were able to elect this up until the point that they receive forgiveness of their PPP loan. Once the loan was forgiven, they were no longer able to defer these employer taxes. The PPP Flexibility Act changed this.  Now companies will be able to have their PPP loan completely forgiven and will also be able to continue to defer the employer’s share of the FICA taxes until 2021 and 2022. 

Loan Duration Extended from 2 Years to 5 Years

For companies that do not receive full forgiveness of their PPP loan, it then operates as a traditional SBA loan subject to the term of the loan.  Originally the PPP loans were amortized for 2 years and carried a 1% interest rate.  With only a 2 year amortization, once the 6 month deferment to payments was up, companies could have had sizable loan payments given the short duration of the amortization schedule.  The PPP Flexibility Act now allows those loans to be amortized over 5 years. 

But we need guidance on this feature. It seems like all PPP loans issued after the passage of this Flexibility Act will adhere to the 5 year amortization schedule, but for PPP loans issued prior to the passing of this bill is it an optional provision on the part of the banks?  They will hopefully address this in the Q&A document. If borrowers have to negotiate with their bank to extend the duration of their loan, they could have a tough time doing so because again, the banks do not want to be servicing loans with a 1% interest rate for 5 years. The banks want those loans forgiven as soon as possible so they can get reimbursed by the SBA and then make new loans at higher interest rates. 

Extension of Loan Payments

The original Paycheck Protection Program allowed borrowers to defer loan payments for a 6 month period. This in most cases would prevent companies from ever having to make a payment on their PPP loan before it was forgiven.  With the new 24 week Covered Period (6 months), they extended the payment deferral for these PPP Loans to “the date the lender receives the forgiveness amount from the SBA”, which in many cases will now be longer than the 6 month period. 

This Creates New Questions

The other positive of this PPP Covered Period extension is it gives the SBA and Treasury more time to issue much needed guidance on some of these grey areas that exist within the PPP program.  We already covered a number of these unanswered questions earlier in the article but there is a big one that remains unanswered.  With the Covered Period being extended to 24 weeks, most companies will reach the end of their covered period in October and November, and the forgiveness process could take over 60 days bringing the actual forgiveness event in 2021.  Since, as of right now, companies cannot take a deduction for expenses paid with the forgiven PPP loan, accountants will be challenged on how to account for those expenses if forgiveness is still pending.  Which is probably something that needs to be addressed as some point in the Q&A. 

New Forgiveness Application

The first version of the SBA PPP Forgiveness Application was released a few weeks ago but given these changes to the PPP Program, I would be greatly surprised if they don't go back and create a revised Forgiveness Application.   Hopefully, the next application is a lot shorter than 11 pages and it should be. Since many companies will be able to satisfy the full PPP loan amount with just payroll cost for their employees, it seems like that should be an option on a single page, certifying the amount that was spent on straight payroll, that employee headcount and wages have been restored by a given date, in turn making the forgiveness process much easier for everyone.  After all of the madness that everyone has been through with this everchanging PPP program, a one-page PPP forgiveness application would be a welcomed gift for business owners, bankers, and financial professionals. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits

How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits

As the economy continues to slow, unemployment claims continue to rise at historic rates.  Due to this expected increase in unemployment, the CARES Act included provisions for Coronavirus related distributions which give people access to retirement dollars with more favorable tax treatment.  Details on these distributions can be found here.  With retirement dollars becoming more accessible with the CARES Act, a common question we are receiving is “Will a retirement distribution impact my Unemployment Benefits?”.

Unemployment Benefits vary from state to state and therefore the answer to this question can be different depending on the state you reside in.  This article will focus on New York State Unemployment Benefits, but a lot of the items discussed may be applied similarly in other states.

The answer to this question also depends on the type of retirement account you are receiving money from so we will touch on the most common. 

Note:  Typically, to qualify for unemployment insurance benefits, you must have been paid minimum wage during the “base period”.  Base period is defined as the first four quarters of the last five calendar quarters prior to the calendar quarter which the claim is effective.  “Base period employer” is any employer that paid the claimant during the base period.

Pension Reduction

Money received from a pension that a base period employer contributed to will result in a dollar for dollar reduction in your unemployment benefit.  Even if you partially contributed to the pension, 100% of the amount received will result in an unemployment benefit reduction.

If you were the sole contributor to the pension, then the unemployment benefit should not be impacted.

Even if you are retired from a job and receiving a pension, you may still qualify for unemployment benefits if you are actively seeking employment.

Qualified Retirement Plans (examples; 401(k), 403(b))

If the account you are accessing is from a base period employer, a withdrawal from a qualified retirement plan could result in a reduction in your unemployment benefit.  It is common for retirement plans to include some type of match or profit-sharing element which would qualify as an employer contribution.  Accounts which include employer contributions may result in a reduction of your unemployment benefit.

We recommend you contact the unemployment claims center to determine how these distributions would impact your benefit amount before taking them.

IRA

No unemployment benefit rate reduction will occur if the distribution is from a qualified IRA.Knowing there is no reduction caused by qualified IRA withdrawals, a common practice is rolling money from a qualified retirement plan into an IRA and then accessing it as needed.  Once you are no longer at the employer, you are often able to take a distribution from the plan.  Rolling it into an IRA and accessing the money from that account rather than directly from the retirement plan could result in a higher unemployment benefit. 

NYS Unemployment Home Page

National Unemployment Resource Finder - careeronestop

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Requesting Mortgage Forbearance: Be Careful

Due to the rapid rise in the unemployment rate as a result of the Coronavirus, Congress passed the CARES Act which includes a provision that provides mortgage relief to homeowners that have federally-backed mortgages.  Homeowners are eligible for a 180 day forbearance on their mortgage payments which can provide much needed financial relief for individuals and families that are struggling due to the COVID-19 containment efforts.   Even if you do not have a federally-back mortgage, some banks are voluntarily offering homeowners forbearance options on their mortgage payments. But before you choose this option, you should be aware of the following items: 

• How does forbearance work?

• Who qualifies for mortgage forbearance?

• What is the process for requesting a forbearance?

• Does forbearance hurt your credit score?

• What are the repayment options?

• The hidden costs of forbearance

• Other options for mortgage relief

How Does Mortgage Forbearance Work?

Mortgage forbearance allows homeowners to defer monthly mortgage payments for a specific period of time.  Under the CARES Act, homeowners that qualify, will be able to delay their mortgage payments for the next 6 months.  But it’s important to understand that “forbearance” delays mortgage payments, it does not forgive those payment.  At some point in the future, you will have to make up for those missed payments. 

Who Is Eligible For Mortgage Forbearance?

Under the CARES Act, homeowners that have federally-backed mortgages are eligible for a forbearance up to 180 days.  But as I mentioned above, homeowners that do not have federally-backed mortgages may also be eligible but it’s at the discretion of the loan servicer.  How do you know if you have a federally-backed mortgage?  Here is a list of the federal agencies: 

• FHA

• VA

• Freddie Mac

• Fannie Mae

• USDA

Do You Have A Government Backed Mortgage?

If you are not sure whether or not your mortgage is backed by the federal government, there are a few ways to find out but we recommend not blindly calling the bank that issued your mortgage.  The bank that issued your mortgage may be different than the company that “services” your mortgage.  It’s not uncommon for lenders to sell the servicing rights of their mortgages to other companies.  If you are considering applying for forbearance, you will need to consult with the loan servicer. 

As you can image, these loan servicing companies are being overwhelmed right now with homeowners requesting forbearance of their mortgage payments.  If you are able to determine whether or not you have a federally-backed mortgage yourself, it will save you time and frustration.  Here are a few different ways to determine if your mortgage is backed by a federal agency: 

• FHA Insurance Payments: If you look at your mortgage statement and you see FHA insurance payments being made, your loan is backed by the FHA. You can also look at your mortgage closing documents, specifically your HUD form.

• Fannie Mae & Freddie Mac Websites: Almost 50% of all mortgages issued in U.S. are backed by either Fannie Mae or Feddie Mac. You can run a search on their websites to determine if your mortgage is backed by either of those two agencies.

Fannie Mae Website

Freddie Mac Website

• Contact Loan Servicer: If you are still unable to determine whether or not your mortgage is federally-backed, you can contact your loan servicer. The contact information for your loan servicer is usually listed on your monthly mortgage statement but if you don’t have access to your statement, you may be able to locate your loan servicer via the Mortgage Electronic Registration System

Mortgages Not Backed By A Federal Agency

If your mortgage is not backed by a federal agency, you still may be eligible for a mortgage forbearance but that will be at the complete discretion of your loan servicing company.  You will need to contact your loan servicer but unlike federally-backed loans, they are not required to offer you a forbearance.   You should be prepared to answer a number of questions such as: 

• Why are you applying for the forbearance?

• How long do you need the forbearance for?

• Details about the status of your income, expenses, and employment

The Forbearance Process

Whether you have a federally-backed mortgage or not, you will have to pro-actively reach out to your loan servicing company to request the forbearance; it does not happen automatically.  If you qualify for the forbearance, there are two key pieces of information that you should obtain before that call is finished. 

• Determine the repayment terms for those missed payments

• Request your forbearance agreement in writing

Repayment Options

Since you have to repay these missed mortgage payments at some point in the future, it’s incredibly important to understand the terms of the repayment.  Some loan servicing companies are requesting a “balloon payment” which means if you are granted a 6 month forbearance, when you reach the end of that 6 month period, all of the missed mortgage payments are due in a lump sum amount; not a favorable situation for most homeowners.  Here are the three most common repayment options: 

• Balloon Payment: All of the missed payments are due as a single lump sum payment at the end of the forbearance term. This is the least favorable option for homeowners.

• Extended Term: This option extends the term of your mortgage by the length of the forbearance. If you receive a 3 month forbearance and you have a 30 year mortgage, they will extend the term of your 30 year mortgage by an additional 3 months. This is usually the most favorable option for borrowers.

• Re-amortize The Loan: Unlike the “extend the term” option, the maturity date of your mortgage stays the same, and when you restart mortgage payments at the end of the forbearance period, they spread those missed payments over the remaining life of the mortgage. This will result in a slightly higher mortgage payment compared to your mortgage payment prior to the forbearance period.

Get The Forbearance Offer In Writing

With all of these moving parts, it’s extremely important to request that your loan servicer sends you the forbearance agreement in writing.  You definitely want to make sure nothing was missed or miscommunicated otherwise you could damage your credit score, end up in a foreclosure situation, or have an unexpectedly large mortgage payment waiting for you at the end of the forbearance period. 

Does Mortgage Forbearance Affect Credit?

If done correctly, a mortgage forbearance will not negatively impact your credit score. 

Hidden Cost of Forbearance

While there are no late fees assessed on these missed mortgage payments associated with a forbearance agreement, there is additional interest that accumulates over the remaining life of the mortgage when the repayment option involves either an extended term or re-amortization. 

Example:  Homeowner has a $250,000 federally-backed mortgage, 4% interest rate, with 20 years left on the mortgage.  This homeowners was financially impacted by COVID-19 and is granted a 6 month forbearance with an extended term repayment. How much additional mortgage interest did that individual pay over the remaining life of the mortgage due to that 6-month forbearance? 

Answer:  $3,159 

So this option is not “free” by any means but it may be a reasonable price for homeowners to pay compared to the negative financial impact of missing mortgage payments without forbearance. 

Other Options Beside Forbearance

If your bank does not grant you forbearance, or you want to consider other options, the CARES Act did open up other forms of financial relief to taxpayers in the form of: 

• Penalty Free Distributions From IRA’s & 401(k) Plans

• 401(k) Loans Up To $100,000

• IRS Stimulus Checks

Each option has it’s own pros and cons but you can read more about these options via the links above. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Coronavirus RMD Relief: Ability To Waive Mandatory IRA Distributions In 2020

Congress passed the CARES Act in March 2020 which provides individuals with IRA, 401(k), and other employer sponsored retirement accounts, the option to waive their required minimum distribution (RMD) for the 2020 tax year.  This option is available to both individual over the age of 70½ and non-spouse beneficiaries of inherited IRA’s.   In this article we will review: 

• The new RMD waiver rules

• RMD’s for individuals age 70.5

• RMD’s for beneficiaries of Inherited IRA’s

• What happens if you already took your distribution for 2020?

• Options for putting the RMD back into your IRA

Who Qualifies For The RMD Waiver?

Unlike other provisions in the CARES Act that require an individual to demonstrate that they have been impacted by the Coronavirus to gain access, the waiver of 2020 required minimum distributions is available to everyone.  If you were age 70½ prior to December 31, 2019 or are the non-spouse beneficiary of an IRA, you are typically required to take a small distribution from your IRA each year, called an “RMD”, and pay tax on those distributions.  However, for 2020, if you want to keep that money in your IRA in 2020 and avoid the tax hit associated with taking the distribution, you have the option to do so. 

What If You Already Took Your RMD for 2020?

If you already received the RMD amount from your IRA for 2020, you may be able to return it to your IRA, and avoid the tax hit. 

If the distribution came from your own personal IRA, not an inherited IRA, you will have two options: 

OPTION 1:  If the distribution happened within the last 60 days, you can simply return the money to your IRA. For this option, you are utilizing the 60-day rollover rule which allows you to take money out of an IRA, return it within 60 days, and avoid the tax liability.   You are only allowed one 60-day rollover every 12 months. 

OPTION 2:  If the distribution took place more than 60 days ago, you will only be allowed to return it to your IRA if you qualify based on one of the four Coronavirus-Related Distribution criteria: 

• You, your spouse, or a dependent was diagnosed with the COVID-19

• You are unable to work due to lack of childcare resulting from COVID-19

• You own a business that has closed or is operating under reduced hours due to COVID-19

• You have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced because of COVID-19

If you qualify under one of these items, then you will have 3-years from the date of the distribution to return the money back to your IRA and avoid the tax hit. However, while you have 3-years to return it to the IRA, if you don’t return the money to your IRA prior to December 31, 2020, you will have a tax liability in 2020 for all or a portion of that IRA distribution.  It’s only when you actually return the money to your IRA that the tax liability is nullified. If you return it in a future tax year, you would have to go back and amend your 2020 tax return to recapture the taxes that were paid. 

Inherited IRA – Non-spouse Beneficiary

However, if you are a non-spouse beneficiary of an IRA, the rules for returning the money to your IRA are different.  If you are a non-spouse beneficiary of an IRA and you already received your RMD for 2020, you cannot return that money to your IRA to avoid the tax liability. Why is this? Beneficiaries are not eligible to make rollovers, so that disqualifies them from return the money to the IRA under the rollover rules in the CARES Act. 

A Note To Our Greenbush Financial Clients

If you wish to waiver your RMD to 2020 or if have already received your RMD, and wish to process a rollover back into your IRA, 401(k), or employer sponsored plan, please contact us. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Coronavirus Relief: $100K 401(k) Loans & Penalty Free Distributions

With the passing of the CARES Act, Congress made new distribution and loan options available within 401(k) plans, IRA’s, and other types of employer sponsored plans. These new distribution options will provide employees and business owners with access to their retirement accounts with the: 

• 10% early withdrawal penalty waived

• Option to spread the income tax liability over a 3-year period

• Option to repay the distribution and avoid taxes altogether

• 401(k) loans up to $100,000 with loan payments deferred for 1 year

Many individuals and small businesses are in a cash crunch. Individuals are waiting for their IRS Stimulus Checks and many small business owners are in the process of applying for the new SBA Disaster Loans and SBA Paycheck Protection Loans.  Since no one knows at this point how long it will take the IRS checks to arrive or how long it will take to process these new SBA loans, people are looking for access to cash now to help bridge the gap.  The CARES Act opened up options within pre-tax retirement accounts to provide that bridge. 

10% Early Withdrawal Penalty Waived

Under the CARES Act, “Coronavirus Related Distributions” up to $100,000 are not subject the 10% early withdrawal penalty for individuals under the age of 59½. The exception will apply to distributions from: 

• IRA’s

• 401(K)

• 403(b)

• Simple IRA

• SEP IRA

• Other types of Employer Sponsored Plans

To qualify for the waiver of the 10% early withdrawal penalty, you must meet one of the following criteria: 

• You, your spouse, or a dependent was diagnosed with the COVID-19

• You are unable to work due to lack of childcare resulting from COVID-19

• You own a business that has closed or is operating under reduced hours due to COVID-19

• You have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced because of COVID-19

They obviously made the definition very broad and it’s anticipated that a lot of taxpayers will qualify under one of the four criteria listed above.  The IRS may also take a similar broad approach in the application of these new qualifying circumstances. 

Tax Impact

While the 10% early withdrawal penalty can be waived, in most cases, when you take a distribution from a pre-tax retirement account, you still have to pay income tax on the distribution.   That is still true of these Coronavirus Related Distributions but there are options to help either mitigate or completely eliminate the income tax liability associated with taking these distributions from your retirement accounts. 

Tax Liability Spread Over 3 Years

Normally when you take a distribution from a pre-tax retirement account, you have to pay income tax on the full amount of the distribution in the year that the distribution takes place. 

However, under these new rules, by default, if you take a Coronavirus-Related Distribution from your 401(k), IRA, or other type of employer sponsored plan, the income tax liability will be split evenly between 2020, 2021, and 2022 unless you make a different election.  This will help individuals by potentially lowering the income tax liability on these distributions by spreading the income across three separate tax years.  However, taxpayers do have the option to voluntarily elect to have the full distribution taxed in 2020.   If your income has dropped significantly in 2020, this may be an attractive option instead of deferring that additional income into a tax year where your income has returned to it’s higher level. 

1099R Issue

I admittedly have no idea how the tax reporting is going to work for these Coronavirus-Related Distributions. Normally when you take a distribution from a retirement account, the custodian issues you a 1099R Tax Form at the end of the year for the amount of the distribution which is how the IRS cross checks that you reported that income on your tax return.  If the default option is to split the distribution evenly between three separate tax years, it would seem logical that the custodians would now have to issue three separate 1099R tax forms for 2020, 2021, and 2022.    As of right now, we don’t have any guidance as to how this is going to work. 

Repayment Option

There is also a repayment option associated with these Coronavirus Related Distributions, that will provide taxpayers with the option to repay these distributions back into their retirement accounts within a 3-year period and avoid having to pay income tax on these distributions. If individuals elect this option, not only did they avoid the 10% early withdrawal penalty, but they also avoided having to pay tax on the distribution. The distribution essentially becomes an “interest free loan” that you made to yourself using your retirement account. 

The 3-year repayment period begins the day after the individual receives the Coronavirus Related Distribution.  The repayment is technically treated as a “rollover” similar to the 60 day rollover rule but instead of having only 60 days to process the rollover, taxpayers will have 3 years. 

The timing of the repayment is also flexible. You can either repay the distribution as a: 

• Single lump sum

• Partial payments over the course of the 3 year period

Even if you do not repay the full amount of the distribution, any amount that you do repay will avoid income taxation.   If you take a Coronavirus Related Distribution, whether you decide to have the distribution split into the three separate tax years or all in 2020, if you repay a portion or all of the distribution within that three year window, you can amend your tax return for the year that the taxes were paid on that distribution, and recoup the income taxes that you paid. 

Example: I take a $100,000 distribution from my IRA in April 2020.  Since my income is lower in 2020, I elect to have the full distribution taxed to me in 2020,  and remit that taxes with my 2020 tax return. The business has a good year in 2021, so in January 2022 I return the full $100,000 to my IRA.  I can now amend my 2020 tax return and recapture the income tax that I paid for that $100,000 distribution that qualified as a Coronavirus Related Distribution. 

No 20% Withholding Requirement

Normally when you take cash distributions from employee sponsored retirement plans, they are subject to a mandatory 20% federal tax withholding; that requirement has been waived for these Coronavirus Related Distributions up to the $100,000 threshold, so plan participants have access to their full account balance. 

Cash Bridge Strategy

Here are some examples as to how individuals and small business owners may be able to use these strategies. 

For small business owners that intend to apply for the new SBA Disaster Loan (EIDL) and/or SBA Paycheck Protection Program (PPP),  the underwriting process will most likely take a few weeks before the company actually receives the money for the loan.   Some businesses need cash sooner than that just to keep the lights on while they are waiting for the SBA money to arrive.  A business owner could take a $100,000 from the 401(K) plan, use that money to operate the business, and they have 3 years to return that money to 401(k) plan to avoid having to pay income tax on that distribution.  The risk of course, is if the business goes under, then the business owner may not have the cash to repay the loan. In that case, if the owner was under the age of 59½, they avoided the 10% early withdrawal penalty, but would have to pay income tax on the distribution amount. 

For individuals and families that are struggling to make ends meet due to the virus containment efforts, they could take a distribution from their retirement account to help subsidize their income while they are waiting for the IRS Stimulus checks to arrive.  When they receive the IRS stimulus checks or return to work full time, they can repay the money back into their retirement account prior to the end of the year to avoid the tax liability associated with the distribution for 2020. 

401(k) Plan Sponsors

I wanted to issue a special note the plan sponsors of these employer sponsored plans, these Coronavirus Related Distributions are an “optional” feature within the retirement plan. If you want to provide your employees with the opportunity to take these distributions from the plan, you will need to contact your third party administrator, and authorize them to make these distributions. This change will eventually require a plan amendment but companies have until 2022 to amend their plan to allow these Coronavirus Related Distributions to happen now, and the amendment will apply retroactively. 

$100,000 Loan Option

The CARES Act also opened up the option to take a $100,000 loan against your 401(k) or 403(b) balance.  Normally, the 401(k) maximum loan amount is the lesser of: 

50% of your vested balance  OR  $50,000 

The CARES Act includes a provision that will allow plan sponsors to amend their loan program to allow “Coronavirus Related Loans” which increases the maximum loan amount to the lesser of: 

100% of your vested balance  OR  $100,000 

To gain access to these higher loan amounts, plan participants have to self attest to the same criteria as the waiver of the 10% early withdrawal penalty.  But remember, loans are an optional plan provision within these retirement plans so your plan may or may not allow loans.  If the plan sponsors want to allow these high threshold loans, similar to the Coronavirus Related Distributions, they will need to contact their plan administrator authorizing them to do so and process the plan amendment by 2022. 

No Loan Payments For 1 Year

Normally when you take a 401(K) loan, the company begins the payroll deductions for your loan payment immediately after you receive the loan.  The CARES act will allow plan participants that qualify for these Coronavirus loans to defer loan payments for up to one year.  The loan just has to be taken prior to December 31, 2020. 

Caution

While the CARES ACT provides some new distribution and loan options for individuals impacted by the Coronavirus, there are always downsides to using money in your retirement account for purposes other than retirement.  The short list is: 

• The money is no longer invested

• If the distribution is not returned to the account within 3 years, you will have a tax liability

• If you use your retirement account to fund the business and the business fails, you could have to work a lot longer than you anticipated

• If you take a big 401(k) loan, even though you don’t have to make loan payments now, a year from the issuance of the loan, you will have big deductions from your paycheck as those loan payments are required to begin.

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future. 

Coronavirus SBA Loan Forgiveness Program

On March 27, 2020, Congress officially passed the CARES Act which includes the SBA Paycheck Protection Program.  This program offers loans to small businesses that can be forgiven if certain conditions are met.  A special note, this SBA program is separate from the SBA Disaster Loan Program called the Economic Injury Disaster Loan Program. 

In this article we will review: 

• The terms of the Paycheck Protection Program

• How the loan amount is calculated

• Deferred Payments for 6 to 12 months

• How to apply for the loans

• The loan forgiveness process

• Restrictions on what the loans can be used for

• Other loan programs available to small businesses

Paycheck Protection Program

This is a new loan program sponsored by the SBA that was put in place to provide small business owners with access to cash to sustain normal business operations over the course of the next 8 weeks.  While these are technically loans, if the guidelines of the program are followed, business owners will: 

• Never have to make a loan payment

• Have the full loan amount forgiven

• There are no fees to apply for the loan

• Higher and faster approval rates compared to other lending programs

Business Expenses Covered By These Loans

This program is very specific about what the money can be used for.  In order to qualify for forgiveness of the loan amount, the loan proceeds have to be used for: 

• Payroll & commission payments

• Mortgage or rent payments

• Group health benefits including insurance premiums

• Vacation, medical, or sick leave payments

• Utility payments

• Interest on debt obligations previous to February 15, 2020

More specifically, it’s to cover expenses incurred between February 15, 2020 and June 30, 2020. 

Who Qualifies For These SBA Loans?

Most small businesses will be eligible to apply for these loans. Here are the application requirements: 

• The business has been in operation since February 15, 2020

• The business has 500 or less employees

• The business has paid salaries, payroll taxes, or Form 1099 non-employee compensation

• Ability to demonstrate that your business was economically affected by COVID-19

Sole proprietors, independent contractors, and 501(c)(3) entities are also eligible to apply. 

Terms of the Loans

There are a number of unique features about this SBA loan program that will make it very appealing to small business owners: 

• No fees to apply for the loan

• No collateral required

• No personal guarantees

• Maximum interest rate of 4%

• Maximum 10-year amortization

• Ability to defer payments for 6 to 12 months (depending on your lender)

• No pre-payment penalty

• Loan forgiveness if program requirements are met

Loan Forgiveness

There are requirements that have to be met in order for all or a portion of the loan amount to be forgiven by the SBA. 

• The money has to be spent on qualified expenses (listed above)

• The expenses have to be incurred within 8 weeks after the loan is approved

• The business has to maintain the same number of employees between Feb 15th and June 30th that it did during same period in 2019 or from January 1, 2020 until February 15, 2020

• You cannot reduce employee wages by more than 25% for employee with less than $100K in compensation

Going outside of these requirements will either reduce or eliminate the amount of the loan that is forgiven by the SBA.   We are still waiting for clarification on a number of business scenarios concerning employee headcount and wage calculations. The CARES Act was over 800 pages long, but it does seem as of right now, that if you rehire employees that were previously laid off at the beginning of the period, or restore wages that were previously reduced, you will not be penalized as long as you do this by either the end the initial 8 week period or June 30th. We still need clarification as to which deadline will apply. 

Is The Loan Forgiveness Amount Taxable?

No.  Within this program, the amount that is forgiven is considered a tax-free grant from the U.S. government. 

How Is The Amount Of The SBA Loan Calculated?

Since this program was implemented to help businesses support payroll expenses, when you apply for the loan, you will need to submit payroll documentation for the previous 12 months.  The calculation for these loans is very simple: 

• Total payroll expenses for the previous 12 months

• DIVIDED by 12 months

• MULTIPLIED by 2.5

In the calculation of the total payroll expenses, any employees making more than $100,000, they cap their compensation at $100,000 for purposes of the maximum loan calculation.  Also, the amount available in the form this SBA loan is the LESSER of: 

2.5 times monthly payroll expenses  OR   $10 million dollars 

Here is a quick example: 

Company XYX has 1 owner and 3 employees with the following payroll expenses for the past 12 months: 

Owner:  $200,000

Employee 1:  $90,000

Employee 2:  $60,000

Employee 3:  $50,000 

Since the owner’s salary is capped at $100,000, it will result in the following maximum loan amount: 

$300,000 / 12 Months = $25,000

$25,000 x 2.5 =  $62,500 

If the company is approved for the $62,500 loan, depending on their bank, they may be able to defer making loan payments for 6 months, and as long as the company spends that money within the next 8 weeks on expenses outlined by the SBA program, maintains headcount and employee wages, they will be eligible for full forgiveness of the loan after that 8 week period without pre-payment penalty or a taxable event. 

How Do You Apply For These Loans?

For the Paycheck Protection Program, these loans will be issued through banks.  When you call your banker you will need to let them know that you are applying for an SBA Paycheck Protection Loan.  The SBA serves as a guarantor for these loans so if the borrower meets the SBA criteria, the bank issues the loan, but if the borrower defaults on the loan, the SBA reimburses the bank for those losses. 

Choose Your Bank Wisely

Not all banks will be participating in this loan program, so you first have to identify which banks in your area are participating in this SBA Paycheck Protection Program.  These loans are going to be in high demand so the banks are most likely going to be overwhelmed with loan applications which could slow down the turnaround time of these loans.  It is prudent to reach out to your professional network, like your accountant, investment advisor, or independent commercial broker, to determine which banks have the capacity to get these loans through quickly. 

It will be extremely important for business owners to submit all of the proper documentation for the loan on the first attempt.   If information is missing from the application or you submit the wrong supporting documentation, it could really slow down the process.  The banks receive a fee from the government for every loan that they process so they have a big incentive to focus on the loans that all of the proper documentation so they can approve them quickly. 

Start The Process Now

For our clients that we believe meet the criteria for this SBA Loan Program, our top recommendation is to start the process now otherwise you could end up in the back of a very long line.  But before you do, you should consult with you accountant, financial advisor, or commercial lender to make sure this is the right program for you.  There are multiple programs out there right now to help support small businesses due to the economic crisis caused by the Coronavirus.   If you take a loan from one program, it could disqualify you from access to other SBA loans or tax credits that are available that could be more beneficial for your business.  Here is our article on the SBA Disaster Loan Program which will be another popular option for businesses impacted by the Coronavirus containment efforts. 

Article:  Coronavirus SBA Disaster Loan Program

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Coronavirus SBA Disaster Loan Program

The Coronavirus containment efforts have put a lot of small businesses in a very difficult situation.  Some businesses have been forced to shut down altogether, while other businesses are working at a reduced capacity.  To help, Congress recently released billions of dollars to be used by the SBA to fund loans to small businesses.  In this article we are going to review: 

• Loan limits for SBA Disaster Loans

• Duration of SBA Disaster Loans

• How SBA Disaster Loans differ from traditional SBA Loans

• How long does it take to get an SBA loan

• The interest rate on SBA loans

• Collateral requirements for SBA Disaster Loans

• Other lending programs available to small businesses

Quick Overview of SBA Loans

For individuals that are new to SBA Loans just a quick note, the SBA can either lend money directly to businesses or it can require a bank to issue the loans.  When the banks issue the loans, the SBA serve as a guarantor for those loan, if the borrower defaults on the loan, the bank gets reimbursed by the SBA for the amount of the default.

There are SBA loans like the “Economic Injury Disaster Loan” that was just made available by Congress that is issued directly from the SBA.  It requires a completion of an online application, submission of documentation to the SBA, and then the loan is either approved or denied by the SBA.

SBA Disaster Loan Limits

The SBA Disaster Loan Program provides loans to businesses up to $2 million dollars. Businesses of course, can take loans for less than that amount. 

Interest Rate For SBA Disaster Loans

By law, SBA Disaster Loans have to be issued with an interest rate under 4% which is much lower than the interest charged for traditional SBA loans. 

Duration of SBA Disaster Loans

The SBA Disaster Loans can be amortized up to a maximum of 30 years.  The option to amortize the loan over 30 years provide small businesses with access to capital with lower monthly payments. 

Collateral for SBA Disaster Loans

For SBA Disaster Loans, collateral is typically required for loans over $25,000.  Due to the unprecedented nature of the Coronavirus crisis, this collateral requirement has been waived.  However, a business must pledge collateral to the extent that it is available. The CARES Act also waived the personal guarantee requirement for loans under $200,000. 

How Long Does It Take To Get An SBA Loan?

So what’s the turnaround time on an SBA loan?  You have to act quickly.  Given the high demand for these loans, the banks and SBA are most likely going to be overwhelmed with SBA loan applications.   Even though this money has been made available to small businesses, the loans can only be issued as quickly as they can be processed.  If you do not start the application now, it may be months before you actually receive the cash for the loan. Unfortunately, some business will not be able to wait that long before closing their doors so it’s important to start the process now.

SBA Disaster Loans between $350,000 and $1M will be considered “SBA Express Loans” and can often be issued within 30 days of the application but the ability to issue the loan within that window will greatly depend on how quickly you can submit the required documents to the bank to complete the underwriting process.  The bank or SBA is going to request:

• Complete Business Loan Application

• Form P-019: Economic Injury Disaster Loan Supporting Information

• IRS Form 4506-T: Request for Transcript of Tax Return

• List of all the owners of the business and the percentage of their ownership

• Most recent tax return for the business

• SBA Form 413: Personal financial statement (for each 20%+ owner of the business)

• SBA Form 2202: Schedule of liabilities listing all fixed debts

• Personal tax returns for each 20%+ owner

• Most recent profit & loss statement and balance sheet for the business

• Current YTD profit / loss statement

They may require some additional documentation but these are the most common items. 

SBA Disaster Loan Underwriting Process

Getting an SBA loan is not guaranteed by any means. Banks and SBA look at three main items: Cash, Credit, and Collateral.  One of the main differences between traditional SBA loans and Disaster SBA loans, is that Disaster Loans have more lax unwriting requirements. While a traditional SBA loans may require all three cash, credit, and collateral to be strong, a disaster loan may only require one of those three items to be in a strong position.

It is very important to apply for the SBA Disaster Loan sooner rather than later based on the cash position of the business. You want to apply for the loan while the cash position of the business is still in decent shape, it increases your chances of being approved.   If the business begins taking losses or revenue has stopped entirely, it will be much more difficult to get approved for the SBA Disaster Loan.

Even if your business does not need the money now, it may make sense to apply for the loan, and just keep the cash in the business checking account in case the business needs that capital a few months from now, it’s cheap capital.  There are no loan origination fees charged to the borrower to apply for these SBA Disaster Loans and with an interest rate of 3.75%, if the business takes out a loan for $300,000, it’s only costing the business $750 per month in interest expense to have that cash on hand.

$10,000 Grant

The CARES Act includes an emergency grant in the amount of $10,000 to any small business or nonprofit that applies for the Economic Injury Disaster Program.  When the business owner applies for this SBA Disaster loan, they can request for the grant amount to be advanced within 3 days of submitting the loan application. There are restrictions as to what the grant money can be used for such as payroll, paying a mortgage or rent, and other expenses specifically outlines by the EIDL. 

Other Business Loan Programs

As a result of the Coronavirus stimulus package, there are a number of other lending programs available to small businesses besides the SBA Disaster Loan Program. Some individual states have developed their own lending programs to give small businesses access to interest free loans quickly.  There is also the new Paycheck Protection Loan Program associated with the CARES Act that was recently passed, these loans have a loan forgiveness feature associated with them if certain terms are met.  The terms of these other loan programs may end up being more favorable than the SBA Disaster Loan Program but it will have to be assessed on a case by case basis. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

IRS Stimulus Checks To Individuals: Eligibility & Timing

The U.S. Senate recently passed the CARES Act which was put in place to help stabilize the economy in the wake of the Coronavirus containment efforts.  One of the key items in the bill are the stimulus checks that the IRS will issue to individuals and their children.  In this article we will review: 

• The amount of the IRS checks

• What makes you eligible to receive a check

• Income Limitations & Phaseouts

• When To Expect The Payment

• Direct Deposit vs Physical Check

• Unanswered Questions That Need Clarification

IRS Checks To Individuals

The government plans to immediately begin issuing checks directly to individual taxpayers. Individuals that qualify will be eligible to receive a check for $1,200 plus $500 for each child.

Example: A household that has 2 parents and 3 children may be eligible to receive a payment from the IRS in the amount of $3,900.

Parent 1:   $1,200

Parent 2:   $1,200

Child 1:      $500

Child 2:      $500

Child 3:      $500

Are You Eligible To Receive A Check From The IRS?

Whether or not you receive a check from the IRS will be depend on your taxable income for either 2019 or 2018.

• Single Filer: Less than $75,000

• Married Filing Joint: Less Than $150,000

There is a phaseout of the payments between:

• Single Filer: $75,000 – $99,000

• Married Filing Joint: $150,000 – $198,000

Once above the income limits for a single filer of $99,000 and the joint filer of $198,000, you will not be eligible to receive a check.

If you already filed your taxes for 2019, the IRS will look at your 2019 tax return.  If you have not filed your taxes for 2019, then the IRS will look at your income on your 2018 tax return.  If you did not file a tax return for either year, then the IRS will look at your wages that were reported to social security in those tax years.

What If You Have Less Income In 2020?

But what happens if you were over those income limits for 2018 and 2019 but because of the Coronavirus, your income will be lower in 2020 making you eligible for the payments?  You will not receive a check like everyone else but you will be able to capture the payments as a tax credit when you file your 2020 tax return.  The payments from the IRS are really “tax credits” that the government is sending to individuals in advance of the filing of their 2020 tax return.  Instead of making individuals wait to file their 2020 tax return, the IRS is sending the money to these individuals now.

Second scenario, what if your income was lower in 2018 and 2019 qualifying you for the IRS check but in 2020 your income will be above the threshold. Answer, we don’t know.  As of right now there does not seem to be language in the bill saying that they’re going to recapture the credit when you file your 2020 tax return but this is one of those items that will need to be addressed by the IRS after the fact.

How Long Will It Take To Get The IRS Check?

This is the biggest question mark right now.  It seems like the IRS is going to direct deposit these payments to your checking account for anyone that has ACH instructions on file with the IRS.  If you have ever received a refund or made tax payments directly from your checking account, this would apply to you.  However, what if someone no longer has that bank account?  We are not sure how that is going to work.  The direct deposits may happen sometime in April.

If the IRS does not have bank account instructions on file, they will have to cut physical checks. The last time Congress issued checks to people as part of a stimulus package was 2008 and it took 2 months for those checks to arrive.  If this follows a similar path, individual taxpayers might not receive these IRS checks until May but this is another item that still needs to be addressed by the IRS.

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.