Last week’s coronavirus-caused ghastly unemployment claims number was the beginning of the bad. Initial projections of 10 percent unemployment are giving way to 15 percent by the end of the second quarter, according to Goldman Sachs, and 32.1 percent, according to the Federal Reserve Bank of St. Louis’ projection. The latter would surpass peak unemployment during the Great Depression.
The good news? A consensus of outlooks shows record short-term retraction of GDP followed by record fourth quarter output, suggesting a light at the end of the tunnel for the American worker, retirement saver, and business owner–if the country can collectively white-knuckle the forced shut down of the economy under the coronavirus pandemic.
Advisors to retirement plans will play a critical role, says Eric Stevenson, president of Nationwide Retirement Plans. “This is the time they have to be more visible than they have ever been,” said Stevenson. “They have to be in constant communication with plan sponsors, even if from a distance.”
Nationwide, which counts 2.5 million participants in its retirement plan unit, was fielding call center inquiries at more than 1,000 times its average rate for exchange calls early in the market panic. Volume has settled, said Stevenson, but remains active since Congress passed and the President signed a historical rescue package into law, an effort he called “amazing.”
“The help cannot come fast enough,” said Stevenson.
Going beyond retirement advice
Retirement provisions of the CARES Act will be familiar to plan advisors. A new coronavirus hardship distribution will be available for up to $100,000 from accounts, as well as a new $100,000 loan limit. The 10 percent penalty on both will be waived. Those that tap savings will have more time to pay the loans back, and more time to pay the taxes owed.
But other provisions of the bill will be more immediately critical to employers. Plan advisors can be indispensable in helping their sponsor clients understand them, thinks Stevenson.
Individuals and families will receive a one-time payment of up to $3,800 for a family of four. And the federal government will be adding $600 to weekly unemployment checks issued by states for 14 weeks.
Checks will be arriving in three weeks, according to Treasury Secretary Steven Mnuchin.
That money could help many savers avoid tapping 401(k) accounts for loans. So far, loan activity at Nationwide has been muted, but Stevenson expects it to tick up.
Paycheck Protection Program
More disconcerting from a retirement perspective is the number of employers that are already shuttering their doors and furloughing workers. These workers will not be getting paychecks, making deferrals to savings plans, and consequently not earning employer matches.
A cornerstone of the CARES Act is designed to keep employees connected to their employers—keep them paid even if a business is temporarily closed.
The Paycheck Protection Program will back $349 billion in loans to businesses with 500 or fewer employees through the Small Business Administration. Loans will be issued through lenders approved by the SBA, and funds will be available by Friday, April 3.
“The question is how do we all help companies stay in business,” said Stevenson. “Our job is to give plan advisers good counsel they can bring to sponsors. Advisers can’t just focus on the retirement provisions of the CARES Act—they have to understand all of the options available to their employer clients. Assuming we execute this well as a country, this bill should provide a lot of relief to employers, and a lot to participants.”
The below is a snapshot of what is involved in the Paycheck Protection Program, based on a reading of the bill and its synopsis, information posted by the Treasury Department, and analysis by Bijal Vira and Nirav Bhatt, corporate finance attorneys with Shepard Mullin.
1. Funding for up to eight weeks of payroll
The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. (Source: Treasury Department)
2. $349 billion in total federally backed loans
The CARES Act has authorized commitments to the SBA 7(a) loan program, as modified by the CARES Act, in the amount of $349 billion. The Paycheck Protection Program covers the period beginning February 15, 2020 and ending on June 30, 2020 (the Covered Period). (Analysis: Sheppard Mullin)
3. Loans forgiven if they are used to keep employees paid
Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. (Source: Treasury Department)
4. Firms with 500 or fewer employees, and self-employed can apply
Small businesses with 500 or fewer employees—including non-profits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors—are eligible. Businesses with more than 500 employees are eligible in certain industries.
- Starting April 3, 2020, small businesses and sole proprietorships can apply.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply. There is encouragement to apply as quickly as you can because there is a funding cap.
5. Relaxed loan vetting
For eligibility purposes, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor. (Source: Legislative synopsis)
6. Calculating the loan value
During the Covered Period, the maximum loan amount permitted for an eligible Covered Entity is the lesser of $10,000,000 and an amount calculated based on a payroll formula that essentially equals 2.5 x the average total monthly payroll cost incurred in the one-year period before the loan is made.
The interest rates for loans borrowed by a Covered Entity under the program may not exceed four percent (4%).
Any Paycheck Protection Loan that has a remaining principal balance after any applicable loan forgiveness (as covered in detail below) must have a maturity date no later than 10 years from the date on which the borrower applied for loan forgiveness.
The SBA will direct lenders to defer all payments (principal, interest and fees) otherwise due under a Paycheck Protection Loan for a minimum of 6 months and a maximum of 12 months. (Analysis: Sheppard Mullin)
7. Loan forgiveness tied to keeping employees on books
During the 8-week period beginning on the date a Paycheck Protection Loan is funded (the Forgiveness Period), a borrower will be eligible for forgiveness and cancellation of indebtedness for up to the full principal amount of such loan. The amount eligible for forgiveness (the Total Eligible Forgiveness Amount) is equal to the total costs incurred and payments made during the Forgiveness Period for (1) payroll, (2) mortgage interest, (3) rent and (4) utilities.
The loan forgiveness amount available to a borrower is subject to reduction if the borrower terminates employees or reduces employee salary and wages during the Forgiveness Period. There is, however, relief from the forgiveness reduction if the borrower rehires employees or makes up for wage reductions by June 30, 2020. (Analysis: Sheppard Mullin)
8. The loan application
9. How to find an approved lender
The SBA can direct employers to an approved lender here.