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CARES Act unpacked – what do I need to know about the unemployment provisions?

Fallout from the pandemic has led to record unemployment. Whether it’s your first time filing or you’ve been here before, Jeffrey Levine shares what you need to know about filing in the age of COVID-19.

Transcript

Tim Maurer:
Tim Maurer back with another episode of Ask Buckingham, a video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today we’re doing another segment with Buckingham’s director of advanced planning, Jeff Levine, who has been very busy chasing down the details of the CARES Act and how it may and may not benefit you. Jeff, start by please giving us an update on exactly what the CARES Act is and then how it is helping those who are most impacted by the COVID-19 crisis. Those who have lost their jobs completely or are underemployed or have a lack of income as a direct result of the pandemic.

Jeff Levine:
Sure. The CARES Act is a large stimulus bill, the largest we’ve ever seen in the history of our country. That is the third in our bills related to address the COVID-19/coronavirus crisis. So it provides roughly $2.2 trillion of direct spending and another four trillion roughly of loans and loan guarantees, et cetera. So there’s a ton of relief in here for just about everyone, in terms of those who have lost their jobs or have seen cuts to employment. Unfortunately, there’s just an unprecedented number of individuals that it applies to. As we sit here today and record, we’ve just learned that some 10 million people roughly in the last few weeks have lost their jobs and are going on unemployment, which is orders of magnitude higher than anything we’ve ever seen before.

Jeff Levine:
And with that in mind, one of the main benefits of the CARES Act is an enhancement in almost every way for unemployment compensation benefits. They are bigger in most cases, they will be longer, they will go to more people. So there’s relief there as well as relief on the ability to access other funds you may have with lower costs or greater access. So there’s a substantial amount of relief in here for those who are either unemployed or underemployed.

Tim Maurer:
Okay Jeff. So let’s say I lost my job as a result of this crisis, what should my first couple of steps be to make sure I’m getting the most out of the CARES Act?

Jeff Levine:
Well, you definitely want to contact your state and apply for unemployment if you qualify. So in general employees who are let go or otherwise have… are terminated from work or are furloughed et cetera, they may qualify for unemployment. And unemployment is a state-run benefit, but the CARES Act provides federal funds to kind of back up those states. So if you look actually kind of through the CARES Act, it’s very interesting as it goes through the unemployment sections because it essentially says for all these different things that the federal government is offering, if states want, they can contract with us and we will do this. If states want, they can do that. For instance, one of the big benefits under the CARES Act is that unemployment benefits are going to be increased by $600 per week per person for up to four months. And that is huge. I can’t emphasize how significant that is Tim. Because do you have any idea actually what the average unemployment check is in this country per week right now?

Tim Maurer:
Nope. No idea whatsoever.

Jeff Levine:
So it is less than $400. Less than $400 a week is the average on a… It’s about $385. So when we talk about adding $600 on top of the regular benefit that’s already provided by states, we’re talking about the average person seeing almost 150% more in their income as a result of the unemployment from this pandemic than they would in a normal situation. And that’s critically important because this is… With $385 it’s very tough to feed a family. I mean, or to pay rent or mortgage, et cetera. So there would be a significant struggle. At $1,000 a week, most people might be able to make ends meet or at least get closer to it than they would otherwise. So that’s one really big benefit.

Jeff Levine:
The other thing I think is important to understand is that typically unemployment is reserved for employees. Clearly if you’re self-employed and you have a bad couple of weeks, you’d say, “Oh. You know what, I’m just going to fire myself and I’ll get unemployment.” So for that reason, unemployment compensation typically doesn’t apply to self-employed individuals. As a part of the CARES Act, they created something called the Pandemic Unemployment Assistance. And what Pandemic Unemployment Assistance is, it’s essentially another fund created by the federal government that in short says if you don’t qualify for unemployment via regular unemployment mechanisms, there’s this other fund here for you. And that actually includes self-employed individuals. So some people may be thinking, I don’t get this because of my self-employed status. Actually here you do because of the way the CARES Act was written.

Tim Maurer:
Okay. So people are going to be getting more in terms of unemployment compensation than they may have had in the past. How about longer? Because it seems as though for some people, depending on the industry they’re in, the unemployment status could be indefinite here. It’s not like anybody’s going to be adding a whole lot of jobs of the course of the next several weeks.

Jeff Levine:
No. Unfortunately we are probably in a period of sustained underemployment for quite some time here. And the good news again is that it’s not just more people and not just bigger checks, but it is also longer as well. So the standard length of unemployment is actually variable at the state level. Very similar to the way the checks are. Now there’s averages, but the standard length is determined by the state. So you do want to know your state rules. However, once again, the federal government is coming with a backstop here and said, “We will fund an extra 13 weeks of unemployment, if the state wants.”

Jeff Levine:
And again, what state wouldn’t take the money, right? So every state is going to get… The federal government just can’t mandate it. So it basically says to the states in this bill, “Here’s a big pile of money for this, here’s a big pile of money for that, here’s a big pile of money for this, you let us know which of these you’d like.” And states should and probably will take all of them because there’s no downside really to doing so. So there’s some benefits there.

Jeff Levine:
And then lastly, I would say this is that there are some states that have what is called essentially part-time unemployment. Essentially, if you go from 40 hours a week of work, down to 15 hours a week of work, you may still be working, but you’re not hitting your income that you were hitting before. And so there are some states that kind of offer… It’s not unemployment, but it’s basically an underemployment, if you will, a compensation. And the CARES Act authorizes the federal government to cover up to 50% of the costs for starting such a program by states that don’t have it through the end of this year. So hopefully more states will take the Uncle Sam up on that as well.

Tim Maurer:
Yeah. Well, let’s talk more about the underemployed. So while we’ve got higher numbers of unemployment than we’ve ever seen, if you start to conceive of the number of folks in the United States who have lost some form of their income, it’s going to impact a huge number, maybe even the majority of Americans. So what access do Americans have to funds that they may not have had in the past if they’d seen a reduction in their income?

Jeff Levine:
Well, one of the first ones would be if individuals have a loan via their 401(k), 403(b) or other sort of employer plan, they may have greater access to those funds than under previous situations. For instance, if you or your spouse or one of your dependents has been diagnosed with COVID-19 or if you are financially impacted as a result of this crisis because of either you’re quarantined or you’re laid off, you’re furloughed, you can’t work because you can’t find childcare… The Congress was actually very respectful of those who would not be able to work because of childcare issues in this bill. Several places they authorize kind of the same benefits for those individuals, even if they don’t otherwise lose their job. If you can’t work, it’s the same thing. So there’s an ability to take a greater amount out of your plan if there’s… If you’ve qualified based on one of those provisions.

Jeff Levine:
So normally the maximum amount that you can take out of your 401(k) or other qualified plan as a loan is $50,000. The CARES Act doubles that to a maximum of $100,000. In addition, you’re generally only able, as you get beyond the $20,000 loan… Excuse me. 401(k) balance. As your balance goes beyond that, you’re generally only entitled to take half of what’s in your 401(k). So if you had $30,000 of vested money in your 401(k), you could take a loan for 15,000, if you had 40 you could take for 20.

Jeff Levine:
The CARES Act waives that requirement then says whatever you’re vested balance is, you can take a loan of up to that amount. So if you had $75,000 of vested amount, you could take a full loan of all 75,000. Any amount up to that $100,000 maximum cap. And then finally the CARES Act also says that any payments that would be due on that loan from now through the end of 2020 are delayed by a period of one year. And so there’s a lot of flexibility there for those individuals who do have loan provisions. Unfortunately, not everybody has access to that because not everyone has a company plan and not all company plans offer those loans.

Tim Maurer:
Okay. So what if you don’t have that as one of your options at your disposal?

Jeff Levine:
Sure. So another way that the CARES Act provides relief for… specifically for retirement account holders to access funds here is via something called a Coronavirus-Related Distribution. And very similar to the guidance I gave you before in terms of who qualifies, such as you or a close loved one being ill and diagnosed or financial hardship as a result of this crisis, you are able to go in and take out up to a $100,000 from your 401(k), 403(b), your traditional IRA, so this applies to IRAs as well, and there’s a couple of benefits associated with it.

Jeff Levine:
First, if you’re under 59 and a half, there is no 10% penalty, so that’s waived. That’s the first benefit. The second benefit is that normally when you take a distribution from your IRA or 401(k), et cetera, you have to include all of the income from that distribution in the year you take it. Right? So if I took $100,000 out from an IRA, normally in 2020 I’d add $100,000 to my income for this year. A Coronavirus-Related Distribution allows you to spread that income evenly over 2020, 2021, and 2022. Over a three-year period. Now you can however elect to include all of it in 2020 if you want. And the reason I bring that up is because for some people who are struggling and the whole reason they’re taking this money is that their income is very low, they don’t have any, it may actually be to their benefit to go against what normally would be the case, so spread out income over as many years as possible here and elect to include it all this year.

Jeff Levine:
And then finally, another huge benefit is that you have a three-year period beginning on the date after you receive the distribution to pay it back and to eliminate the tax bill. So you can actually pay this back for 2022 maybe you’ve finally saved enough money to repay the distribution that you took now you can pay it back, file amended returns and get back all the tax dollars that you paid on that distribution already. So a phenomenal, phenomenal benefit for those who need access to funds. Again, hopefully that doesn’t apply to you and you don’t have to [inaudible 00:11:43] your retirement account funds because it means there’s less for retirement. But when you need money and your choice is, eat today, pay the mortgage today or worry about retirement in the future, we unfortunately have to prioritize the today.

Tim Maurer:
Okay. And let’s say that someone is receiving less income today. They’re not completely unemployed, they don’t necessarily have access to some form of underemployment benefit and perhaps they don’t have a retirement account, an IRA or a 401(k), to glance at any other provisions in the CARES Act that would help them?

Jeff Levine:
Well certainly, there’s a lot of provisions within the CARE act that may allow… that may reduce their expenses. For instance, student loans are suspended for six months through the end of September. No interest, no payments needed, really a wonderful benefit for borrowers and on top of that if you are trying to pay your loans in order to qualify for certain loan forgiveness programs such as the Public Service Loan Forgiveness Program, the six months actually count towards that program, which is phenomenal. There are other provisions in there that make certain holders of mortgages that are backed by the federal government or multifamily mortgages that are backed by the federal government to provide relief to those who are renting from them.

Jeff Levine:
So there is other relief there that can help individuals maybe not to have more income or more funds to pay for their expenses, but perhaps to lower those expenses if not permanently, at least temporarily on some front. So there’s definitely lots of things in here that people should be aware of, even down to things like if you’re worried about paying for a COVID-19 test, the CARES Act makes clear that this is an expense that you will not have to… We will make sure everybody who needs a test gets a test for free. So there’s a lot in this bill. Again, 880-plus pages. So there’s a little bit of something for just about everyone.

Tim Maurer:
And we’re not going to cover 880 pages in this short video, quite obvious. And so any-

Jeff Levine:
Oh. Come on. Why not?

Tim Maurer:
I know even you don’t have that stamina. So what resources might you point people to if they have additional questions about how the CARES Act may benefit them?

Jeff Levine:
Sure. So I’ve written a full outline of how this bill impacts individuals. They can grab that at kitces.com and that was posted on Friday, March 28th I want to say, or March 27 something along those lines. There we go. I forget my dates. But in addition to that, obviously they are welcome to ask questions at Ask Buckingham and we’re happy to take those questions and see how many of them we can answer because we know that people are really seeking information this time that they know they can rely on. And then to make sure that you’re visiting your federal websites on a regular basis. Now, I will say that with a grain of salt because unfortunately some websites are being updated quicker than others. For instance, we’ve had this bill out for almost a week and I note that the student loan website is still not updated to reflect the new rules.

Jeff Levine:
On the other hand, there’s been a lot of updates in terms of unemployment programs, et cetera. Definitely check with your state. Again, for those who are unemployed, your first move if you are laid off from work, should be to look at your state’s unemployment benefit because the federal benefits will be administered in most cases through your state’s program and you’re going to go through them. So I would say go into your state’s website. Thankfully, despite social distancing, we still can connect via the internet and an online world and that is a blessing in this time.

Tim Maurer:
Indeed it is, and we will continue to connect that way. Thank you again for the education, Jeff, and thank you for tuning into this episode of Ask Buckingham. If you have a question about the CARES Act or anything else within the realm of personal finance that you’d like to see us address, you can do so by navigating to the website askbuckingham.com or by emailing your question to question@askbuckingham.com. There are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge with a sense of calm in pursuit of good decision making. So please follow us. And by all means, Ask Buckingham.

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