What the CARES Act Means for the Economy, by Howard Capital Management, Inc.

April 28, 2020

In a unanimous vote to support individuals, businesses and hospitals from the distress of Covid-19, the CARES Act, or the Coronavirus Aid, Relief and Economic Security Act, was signed by the President on March 27, 2020, making the 800 page bill and $2.2 trillion economic stimulus package the single largest relief bill in U.S. history. The CARES Act is meant to be a helpful response to this pandemic, but the aspects of the bill are intricate with many key takeaways to understand. 

CARES Act Historic Spend

How the largest components of the stimulus package have been roughly allocated:

  • $300 billion - One-time cash payment [tax rebates] to eligible taxpayers if filed a 2018 or 2019 tax return
    • Single taxpayer: $1,200 (incomes up to $75,000-$99,000)
    • Joint taxpayers: $2,400 (incomes up to $150,000-$198,000)
    • Children: additional $500 per child (under the age of 17)
  • $260 billion - Expanded unemployment insurance to expand eligibility and offer workers an additional $600 per week for four months
  • $376 billion - Small business relief through the SBA (U.S. Small Business Administration) for companies with 500 employees or less to prevent layoffs and business closure and maintain payroll for up to 8 weeks of cash-flow assistance
    • $349 billion for the Paycheck Protection Program, PPP, allows the SBA to make forgivable loans up to $10 million for coverage of employee salaries, paid sick/medical leave, insurance premiums, mortgage, rent and utility payments
    • $27 billion for relief through the Economic Injury Disaster Loan (EIDL) emergency advance, and additional new loans and grants for small businesses
    • Additional business tax-credits and payroll tax breaks are available; however, they are not available for businesses who secure PPP
    • Business payroll tax can defer their employer portion, half being due on December 31, 2020 and the latter half December 31, 2022
  • $500 billion - Expanded lending for large businesses and local governments
    • $46 billion is meant to assist aircrafts, air cargo carriers, and national security
    • $454 billion in Federal Reserve lending to support other businesses, non-profit organizations, states, and municipalities
  • $150 billion - Coronavirus Relief Fund to States, Territories, and Tribal governments for public health emergency expenditures (min. $1.25 billion for small population states)
  • $153 billion - Supplemental funding for community and private health systems, Medicare and telehealth will see an expansion
  • $100 billion for hospital assistance (to include expense reimbursement)
  • $27 billion for vaccine development, treatment, expanded Covid-19 testing, medicine and supplies (ventilators and masks)
  • $20 billion for veterans
  • $4.3 billion for the CDC
  • $1.3 billion for community health centers
  • $49 billion - Agriculture and nutrition programs
  • $45 billion - FEMA
  • $27 billion - Elementary, secondary and higher education 


CARES Act Stimulus Breakdown

Who Provides the Loans?

The Secretary of Treasury has the authority to provide loans or guarantee loans to states, municipalities and other eligible businesses. A variety of regulations have been loosened against prior legislation imposed through the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Economic Stabilization Act of 2008, and others. 

What Does This Mean for Retirement Plans?

Distributions: Coronavirus-related distributions for qualified retirement plans will not be penalized by
10-percent early withdrawal penalty (591/2 for IRAs, 401(k)s, 403(b)s). Distributions may be made up to $100,000 made on January 1, 2020 and thereafter. The funds will be taxable up to three years and the taxpayer may contribute the funds back to an eligible retirement plan within three years to avoid taxes.

Required Minimum Distributions (RMDs): RMDs are suspended for the calendar year for 2020 for defined contribution plans and IRAs.

What is the Defense Production Act?

The 2020 stimulus bill also expands the Defense Production Act, which is an initiative meant for building defense equipment for military purposes. The CARES Act offers a two-year period where the government may exceed the $50 million expenditures limit and correct any shortfall production experienced during the pandemic. 

The Response to the Stimulus Package

The Senate and the Congress passed another bill for $484 billion, adding $310 billion of new funding for the SBA’s Payroll Protection Plan (PPP). Of that, $10 billion has been allocated for Economic Injury Disaster Loan (EIDL) and $50 billion to boost the small-business emergency grant and loan program. Agriculture will be defined as a small-business, and some of the money will be earmarked for banks with less than $50 billion in assets. $75 billion has been added to the $100 billion in the original CARES Act for hospitals and $25 billion is included for testing ranging from grants to states and CDC and NIH for research and development. Moving forward, Congress is likely to shift from crisis relief to economic stimulus.

The total unemployment rate is still increasing. As of April 23, 2020, The Department of Labor published unemployment insurance claims numbers totaling roughly 26.5 million claims, representing 16.2% of the labor-force. These numbers are staggering compared to 2008’s 15.3 million. For now, the long run is the most important time frame to give focus and the stock market's volatility will continue to respond to any and all optimism or digressions in the news. The collapse of oil and weak earnings has pushed the market all over the place. Another 2-4 weeks of pullback/consolidation is to be expected; however, it appears the bottom has been set in the 2200 area on the S&P 500 back in March. This pullback might be the last low entry point to buy for 2020. Time will tell.