March 30, 2020 | Vanguard Perspective
Do your clients have questions about the recently enacted CARES Act?
Below are highlights of the main provisions of this $2 trillion stimulus package, which is designed to combat the economic aftershocks of the coronavirus pandemic. Scroll to the bottom of this article to download a Vanguard-branded brief or a customizable unbranded brief to support your client conversations.
Bold action to support the U.S. economy has arrived in the form of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. This roughly $2 trillion stimulus, which was signed into law on March 27, is the largest economic relief effort in American history. The wide-ranging law includes provisions intended to support the health care system's fight against the coronavirus, as well as direct payments to individuals, expanded unemployment insurance, loans to small and large businesses, and support for state and local governments.
Vanguard has been engaged throughout the legislative process, using our trusted voice to advocate in support of investors, workers, businesses, and the broader economy. "Vanguard made it clear to policymakers that the fiscal policy response to the ongoing coronavirus pandemic should be bold, swift, and efficient," said Jerry Golden, Vanguard Government Relations principal and head of U.S. Congressional Affairs.
Joe Davis, Vanguard's global chief economist, has been a leading voice on the need for an aggressive fiscal policy response to the coronavirus pandemic. "In our view, assertive fiscal stimulus that mitigates job losses and business failures is necessary to increase the likelihood of a quick, strong economic recovery," Mr. Davis said.
The spread of the novel coronavirus across the globe has caused a public health crisis and unprecedented disruption to the global economy, financial markets, and everyday life. Extraordinary measures have been taken to control the spread of the virus and, ultimately, eradicate it.
These steps are necessary—the most important action governments can take right now to support the economy is to contain the spread of the virus. But these extreme measures are not without economic consequences. Vanguard expects a sharp contraction in the U.S. economy; we've likely already entered a recession. An aggressive fiscal policy response can help to make this a sharp yet short recession, followed by a speedy recovery.
We've compiled a list of the CARES Act's important provisions to help investors better understand its potential ramifications.
Waiver of early withdrawal penalty: Retirement savers will have more options for coping with the economic impact of the coronavirus. The act waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for those affected by the virus. Further, the income tax due on those distributions can be spread over three years, and investors have three years to return the funds to their accounts. The limits on loans from qualified plans also have been increased, to the lesser of $100,000 or the full vested balance of the account.
Temporary waiver for RMDs: The CARES Act also will help retirees keep their savings in their retirement accounts. It includes a temporary waiver for required minimum distributions (RMDs), which applies to both 2020 RMDs and RMDs due by April 1 for individuals who turned 70½ last year.
Relief for plan sponsors: Retirement plan sponsors may also see relief, as the act authorizes the Department of Labor to postpone certain filing deadlines of the Employee Retirement Income Security Act of 1974 (ERISA) for up to a year because of a public health emergency. Companies offering pensions will have more time to meet their funding obligations, with the due date for 2020 contributions delayed until 2021.
Direct support to individuals: Many Americans will receive a direct infusion of cash through payments of $1,200 for individuals earning up to $75,000 (or $150,000 for couples), plus $500 for each child. These payments will be phased out for higher-income earners. Unemployment insurance will increase by $600 per week for up to four months.
Temporary prohibition of foreclosures and evictions: The act will help those struggling with housing costs by prohibiting foreclosures on all federally backed mortgages for 60 days and allowing homeowners to request up to 180 days of forbearance. For renters, the act includes a 120-day moratorium on evictions for certain rental properties.
Incentives for charitable giving: Taxpayers will be able to deduct up to $300 of cash contributions regardless of whether they itemize deductions, and the limits on charitable deductions for those who do itemize will be increased.
Support for working students: For those pursuing further education while working, employers will be able to offer tax-free student loan repayment benefits of up to $5,250 in 2020.
In Vanguard's view, helping employers stay solvent while retaining their employees and continuing to provide regular paychecks is key to a quick and strong economic recovery. The CARES Act includes a number of provisions that provide incentives to employers that keep their employees on the payroll.
Loans to small businesses: The Paycheck Protection Program will provide about $350 billion for loans to small businesses; loans can be forgiven for businesses that maintain employees and wages. The act also permits a deferral of payroll taxes and provides a refundable payroll tax credit for 50% of wages for business affected by the coronavirus.
Lending for corporations, states, and municipalities: The CARES Act provides for roughly $500 billion in loans to large corporations, states, and municipalities, primarily through the Federal Reserve's lending facilities. These loans will require businesses to retain their workforce and will include restrictions on stock buybacks, payment of dividends, executive compensation, outsourcing of jobs, and labor negotiations.
Oversight and governance: An inspector general for pandemic recovery will be appointed by the president and a five-member congressional oversight commission. The act includes $150 billion in aid to state governments and additional protections for money market mutual funds.
While far from perfect, the CARES Act is an aggressive attempt to meet the challenges facing the economy. "Any legislation of this size, scope, and urgency inevitably requires trade-offs, and we applaud policymakers for coming together to aid the fight against the coronavirus and to support the economy," Mr. Golden said. "Vanguard is eager to continue working with lawmakers on ways to support workers, businesses, and savers as we navigate these uncertain waters."