In the midst of the pandemic in March 2020, U.S. lawmakers passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which offered $2 trillion+ in stimulus funding for the U.S. economy. While this has been a welcome development for individuals and businesses, the Act itself is a labyrinth of features and eligibility conditions that pose important questions for financial professionals. To outline the basics of the Act’s economic benefits and to offer an interpretation of some of its more complex provisions, John is joined by Chris Frank, head of defined contribution consulting at John Hancock Retirement, and Ed Jastrem, CFP, director of financial planning at the Massachusetts-based registered investment advisor Heritage Financial. The topics at issue range from the expansion of unemployment benefits and the impact on federally backed student loans and mortgages to coronavirus-related retirement plan distributions. In addition, the discussion highlights ways in which the Act is still being interpreted by legal and tax professionals, particularly around distributions and guidance for retirement plans and their advisors.
John Bryson:
Hello, and welcome to the Portfolio Intelligence podcast. I'm John Bryson, head of investment consultant at John Hancock Investment Management and your host. The goal of this podcast is to help investment professionals deliver better outcomes for their clients and their practice. Topics will address include advisor business building ideas, capital market updates, the latest trends in portfolio construction, and investment insights from veteran portfolio managers across our global network.
John Bryson:
Now the Coronavirus Aid, Relief, and Economic Security Act, better known as the CARES Act was signed into law by President Trump on March 27, 2020. And it's authorized more than $2 trillion to battle COVID-19 and its economic impacts. And new legislation continues to come out of Washington on a very frequent basis.
John Bryson:
Now it's not possible to cover all the aspects of the CARES Act in a short podcast, but we want to address some of the most important aspects impacting investment professionals. To this end, I've invited two guests to discuss the act. Today I'm joined by two colleagues, Chris Frank, head of defined contribution consulting for the benefits consulting group in John Hancock's retirement plan services division. And Ed Jastrem, director of financial planning and certified financial planner at the $1.5 billion registered investment advisor, Heritage Financial. Gentlemen, welcome to the call.
Chris Frank:
Good afternoon, John. Good afternoon, Ed. Thank you for inviting Assad, John.
Ed Jastrem:
Thank you, John. Thanks Chris.
John Bryson:
All right. Chris, let's start with you. Can you give us an overview of the CARES Act?
Chris Frank:
Sure. So as you mentioned, this was a $2.2 trillion economic relief package. It was the third and also the largest legislative initiative to address COVID-19. Now the act itself contained a number of health related provisions, such as paid sick leave and insurance coverage for coronavirus testing. But I think most people will associate this with the assistance that it provided for American workers and their families. I.e. the economic impact payments or stimulus checks. I'm sure you know someone that got a $1,200 check in the last couple of months. Also you might know people who have been laid off. And in addition to their state unemployment, received enhanced unemployment of $600.
Chris Frank:
And also, you have to look at the focus on small businesses. There was a program, the Paycheck Protection Program that helped small businesses upon application, fund their normal day-to-day costs. Including any costs associated with retirement plans that they may sponsor. And then of course, there was aid for state, local, and tribal governments.
Chris Frank:
But I think what separated this particular relief package from the prior relief packages is that it also contained three retirement related provisions. And those are the provisions that have had people like myself and anyone involved with retirement plans scrambling, for lack of a better term, for the last few months.
Chris Frank:
And these three retirement provisions were a new inservice distribution with less restrictions and more favorable tax treatment. The coronavirus related distribution or what we've now called the CRP. The relaxing of qualified plan loan rules. So right now, plan loans are restricted in terms of amount. And those limits were enhanced. And then you had the waiver of required minimum distributions from defined contribution plans and IRAs for 2020. And those are distributions that are provided mostly for individuals who have left employment, are over age 70 and a half and still have a balance in an IRA or a DC plan.
Chris Frank:
So these again, have required service providers like John Hancock to address from a legal and interpretation standpoint. But also from an operational standpoint, because these provisions were effective immediately. They weren't, "Okay. You need to have this into play by 2021." No, these are provisions that were effective in 2020. And in fact, they're going to expire by the end of the year.
Chris Frank:
So it took a lot of planning by a lot of people. We're still learning things about these provisions. But they are things that advisors really need to hone in on. Because they do affect plans and plan assets, they affect individuals. And it's been difficult for some to navigate because you could be a client or one of our companies that we work with, that maybe wasn't impacted immediately by COVID-19. But over time as it became more financially stressful, now you're starting to see some of the effects. And maybe now you're just starting to possibly furlough people or lay people off. And now, this is where these provisions are really kicking in. Because there are more and more people that may need to tap into their retirement plan savings in order to survive. And the sad and maddening part of this is they don't know when they're going to be able to start putting their lives back together. In some cases, they're not promised the job when things go back to some kind of new normal. So their retirement savings might be their key income for the next six to 12 months.
Chris Frank:
So this is where you not only have to be smart about guidance, but you have to be incredibly thoughtful. Because these are individuals where these are life changing things. So with that, I think I'll stop because I know Ed's probably got something to add on this as well.
John Bryson:
Yeah. Ed, from your standpoint, someone who's working with retail clients. What are some of the high level components of the act that you think people need to think through?
Ed Jastrem:
So first, I would definitely emphasize what Chris mentioned in terms of the somewhat unique nature of this law with its effectiveness being almost immediate. There really wasn't any grace period for advisors, for tax professionals, or the people that develop financial planning software or tax software in addition to custodians and other service providers to really understand all aspects of the law and roll it out. So that's been a challenge from the get go.
Ed Jastrem:
What I would add to Chris' comments is that the act continues to evolve because there's clarifications and procedural modifications from all the different government departments and agencies that have been tasked with interpreting the law and implementing it. So even though the law was passed a few months ago, I think we're still adapting to it. And I would expect that really to continue for the rest of the year for all of us that advise clients to find how to give the best advice to them as the act continues to change during the course of the year.
Ed Jastrem:
I think the key elements that come out of it from an individual perspective. The first and foremost is that personal tax deadlines have been extended. So that's given a lot of people a reprieve temporarily until July 15th in terms of either filing their taxes, or paying taxes that are due. So that's been something that's been in the news for a lot of individuals. And for anybody who owes taxes, a little bit of a relief.
Ed Jastrem:
The other element on the personal front, on the individual front relate to recovery rebates. Which Chris mentioned if someone receives $1,200 recently, that's part of those recovery rebates. There's been expansion of unemployment assistance. And there's also been some relief for mortgages and for student loans. So wrapping back to the recovery rebates or stimulus payments that some people are referring to, this is a tax credit for individuals. Up to $2,400 for married couples and up to $1,200 for single persons, plus the potential for $500 per child under the age of 17. There is an AGI threshold over which these credits start to phase out. For a married couple filing jointly, it's 150,000 of AGI. For a head of household, it's 112,500. And for all other filers, it's 75,000. The tax credit gets reduced by $50 for every thousand over those thresholds.
Ed Jastrem:
From an advisor perspective, there's not much to do proactively to get these recovery rebates. But what I would say is that for anyone in a special circumstance where perhaps their filing status changed over the last couple of years, perhaps they hadn't filed a tax return. If they moved and they changed their address, anything that could cause a hiccup in getting that rebate, I would really recommend that that client or an advisor with those types of clients revisit the IRS website on this topic. Because that site that initially was really missing a lot of key information early on has now been expanded with quite a few questions and answers, and really addresses a lot of the things that have come to light in the last couple of months dealing with making these payments.
Ed Jastrem:
The key takeaway with that is if you're going to the IRS site, don't search for stimulus payments or recovery payments. The key word to really find the accurate information is economic impact payment. That's what the IRS is referring to. And that's where you'll find the key resources for that. Most of the individuals, go ahead.
John Bryson:
Sorry. I just wanted to jump in, because I thought you brought up a really good point there. Not only for the clients, because many of the clients that the financial professionals we deal with have probably have higher income and aren't receiving a check or a small check. But their children certainly could be in that situation. And they would maybe pass this information on to them to make sure that they're going to the IRS website and finding out what's available, and make sure that they're getting what they deserve essentially.
Ed Jastrem:
Certainly, yeah. Young adults. Children of clients who might not receive the benefit depending on the tax filing situation. The children could be eligible. There could be instances where someone who is looking at their income from the past year might be eligible under one circumstance, but not under the other. So it's worth checking for someone who's maybe on the fence or not sure about their circumstances.
Ed Jastrem:
This is one of those planning opportunities for advisors that's relatively low hanging fruit in terms of making an interpretation for a client and getting them the right information. And now that the resources are more widely available from the IRS, whereas a couple of months ago, they really weren't. It's a little bit easier to maybe make a determination if something needs clarification.
Ed Jastrem:
Anecdotally, I have a good friend who got married in October of 2019. And the friend was asking me specifically about this payment in regards to qualification. And one spouse definitively would not have been eligible as an individual. But the other spouse with lower income and lower AGI seemed like maybe they would be. So the question was which tax return are they going to be able to use, and is the IRS going to be looking at the fact that they're now married?
Ed Jastrem:
So it's instances like that where checking up on the circumstances could maybe get you a clear answer or not. And unfortunately in this friend's case, it seems like they're not going to get the stimulus payment. That the IRS is actually looking into what their income is in the subsequent year, not the previous year. But it's the type of question that advisors might have out there.
John Bryson:
Yeah. And worth looking into deeper. Okay. What else did you want to add? I cut you off a little bit there.
Ed Jastrem:
I think in terms of the economic impact payment, that's really it other than researching any very one off particular circumstances that require attention that like I said, searching the IRS website in that area should provide the resources that you need.
Ed Jastrem:
The other element for individuals where advisors need to look up more information or really help a client that I see coming forward are the enhanced unemployment compensation benefits. Which expanded benefits for a longer period of time, for greater dollars. It reduced the waiting period. So it's really designed to provide relief to individuals who have not been able to get employment or lost employment because of the circumstances that we're under.
Ed Jastrem:
I think the most interesting aspect of the enhanced unemployment compensation are benefits for individuals who weren't previously covered by the unemployment system. So self employed individuals, certain contractors, those who weren't paying into the system or covered by the system now have options to get unemployment benefits under what's generally being called Pandemic Unemployment Assistance. So that's very good news for quite a few clients that I work with, that I'm sure many advisors work with who are self-employed or otherwise file a schedule C or 1099 income.
Ed Jastrem:
The kind of good news, bad news trade off is that with this additional benefit that's being provided, it's more complicated to file for unemployment benefits. Such that depending on where you fall in the system, you need to be very careful with which benefit you apply. For many states have within their systems, made it such that if you attempt to apply for multiple unemployment benefits at the same time, either intentionally or inadvertently, you could be effectively canceled out.
Ed Jastrem:
So for anyone who might have a unique employment circumstance, particularly those who are self-employed and looking to claim benefits, it's really important that you follow your state's guidelines as to which program to apply for before you just haphazardly take a shotgun approach. I think that's one of the key takeaways for any advisors working with those type of clients is to be very careful in guiding them as to which program to apply for. And hopefully, the state in which you're operating in has that guidance online to be able to do it.
Ed Jastrem:
One of the other elements of this that comes to light is that traditionally, we don't think of students or young individuals being eligible or even considering applying for unemployment benefits. But this year, there could be a whole group of young people. College age, maybe even younger. People who were expecting to go into a summer job, a paid internship, something that gives them cash in hand for living expenses or to roll next semester's cost of school. And if those students are wrapping up their academic programs, a lot of them finishing now at home. And that summer jobs or summer internship is no longer there. If they were relying on that money or their household relied on that money, there potentially is the option it seems like under this Pandemic Unemployment Assistance program for those individuals to apply to get benefits because they've lost that paying job opportunity.
Ed Jastrem:
There isn't anything specific in the unemployment benefits that excludes students or excludes you from a certain age. And with this expanded unemployment benefit, you don't even necessarily have had to have a employment record before to get the benefits.
Ed Jastrem:
So for those persons that are relying on that money that are having difficulty lining up a summer job to get, it's important to know that this could be available to that population of people that we wouldn't normally think about being eligible for those benefits. The last two areas, go ahead.
John Bryson:
No. I was just going to say, you had mentioned earlier student loans and it seems to tie in to what you're talking about. The fact that whether it's a student job or a student loan, there's some flexibility. And you also mentioned mortgages. I wanted to see what you had to say about those too.
Ed Jastrem:
Yeah. I think those are the next two provisions that come to mind when looking at the benefits and reprieve for individuals under the CARES Act are related to mortgages and student loans. And in both instances for federally backed mortgages and federally backed student loans, there's fairly good relief available to people who need it.
Ed Jastrem:
On the student loan side, what's happened is that the interest rate on federal student loans has been set to zero from March 13th through September 30th. And effectively, those payments that otherwise would have been due are suspended through September 30th. So no interest is going to accrue and nothing's due.
Ed Jastrem:
For mortgages that are federally backed, there's the opportunity for individuals to contact the loan servicer and request a forbearance for up to 180 days. The rub, so to speak with both of these provisions is that they really apply to federally backed loans. So if you don't have a federally backed loan, or if you don't have a federally backed student loan, these rules necessarily aren't applicable to you.
Ed Jastrem:
The good news is that many lenders, whether it's a mortgage, or a student loan, or an auto loan, or some other non-secured loan. Lenders are clearly aware of what's going on. It's very costly and timely to foreclose on someone, to go after someone. Lenders don't want to be the bad person left over when all this is said and done. So even if you don't have a federally backed loan, many lenders are offering the same type of opportunities that might just require a little bit more digging to get the information about your specific loan to find out what's available to you. So that's an area where an advisor could certainly assist a client in dissecting the options. If a lender does provide some sort of relief, interpreting that relief to make sure it really does make sense. Are you simply skipping payments? Are you adding payments to the end of the term? What's exactly going on? Those are the areas that I could see an advisor having some value add in terms of making heads and tails of what's really happening to alone in terms of anything that gets changed with loan provisions.
John Bryson:
Okay, great. Now Chris, I want to come to you. One thing specifically on the student loans. I think there's some options that employers have that they could make available to clients. Can you talk about that?
Chris Frank:
Yeah. So I think it's under section 2206 of the act. It allows an employer to contribute to an employee student loan at no cost to the employee. And that's for an amount up to $5,250. And there's a tax break that's provided to the employer. So they get a benefit there. Also, I say that's 5250. That's not counted towards income for the employee, and it's not counted towards payroll taxes. So again, benefits to both parties.
Chris Frank:
And again, this could be a good benefit for an employer to provide. There's obviously some cost involved. But again, it's another focus area. Ed mentioned student loans, mortgages.
Chris Frank:
And the student loan piece is not something that just came up because of COVID-19. This has come up in the past, and people have tried various ways of bringing student loan payments into play. Some of them involving retirement plans, some of them outside retirement plans. Because I think when you look at the work population. I think good employers recognize that there's a number of new employees, young employees that are saddled with a lot of student loan debt. So they're trying to get creative. Other people in the industry trying to get creative with helping these employers reach these employees through some type of student loan repayment. So they don't feel that they cannot start contributing to their retirement plans.
Chris Frank:
So it's a matter of either helping with student loan payments, or providing some retirement plan contribution on behalf of that employee who's continuing to make student loan repayments. So that they get that head start on longterm savings.
John Bryson:
Yeah, it's great to see that employers recognize that if an individual is behind on one goal, it's going to negatively impact any other goals that they have. And that feels like that's in the realm of this understanding.
John Bryson:
I want to stay on retirement plans because many of the advisors that we work with have individual clients, or they might have clients who are small business owners. And they can help them with certain components of this. But it's really important for financial advisors to also understand what options are available for individuals back at their employer. And I know you work with employers and you started touching upon this. But maybe can you stress for the advisor that might say, "Hey, I don't really do a lot of 401(k) plans, so I don't need to worry about this," kind of highlight what they should really understand?
Chris Frank:
Yeah. So I kind of put them into two sections, John. So before the CARES Act was even released, we were seeing a lot of employers questioning what they could do with their retirement plan, or how was their retirement plan affected by things like layoffs, by things such as financial constraints within the company.
Chris Frank:
So we've worked with clients before the CARES Act even came out to answer questions on suspending employer contributions. That seemed to be the biggest one. But now we're looking at things like, "Can we add a second loan to the loan program?" Because with the CARES Act, we want someone who already has an existing loan to be able to take advantage of the relaxed rules with the CARES Act.
Chris Frank:
People are even getting creative with things like in service withdrawals. Can we allow people to get at their money earlier than later? We've seen people examine what happens to their plan if they layoff a certain amount of people. So you've got rules in the retirement industry like partial plan terminations. What if you have to layoff 30% of your population or more? What does that mean to me, the employer? What does that mean to people who have plan accounts? So those are the things that we've been doing. We've been looking at the impact. Which is to me, sort of unrelated to the CARES Act retirement provisions. But then we've also been interpreting the CARES Act provisions. And the one that came up initially, and Ed made a great point about how we're still learning about what these provisions mean. Is who is eligible for a CRD or COVID-19 distribution.
Chris Frank:
So if you look at the language of the CARES Act, it says he uses the word employee and it talks about self-certification. So if your legal mind goes at this, and I'm a lawyer. I'm like, "Well, if I take a strict interpretation, right to me, this looks like it just is eligible," active employees are the only people eligible or people who have been furloughed. Because they're still technically considered employees. But somebody who terminates shouldn't be eligible for this distribution.
Chris Frank:
So that was just kind of a narrow interpretation. But then other providers and even John Hancock we've said, "Well no, I'm sure the spirit of the law was to allow anyone affected. So terminated employees should be able to take a CRD as well." Well with the CRD, there's no proof required that you're either affected. You've got COVID-19, a family member has COVID-19. Or you've been adversely affected financially.
Chris Frank:
So everyone is sending these in. It's self-certification, no proof needed. Well, now we're starting to get questions from people like, "Hey, what if I made a mistake? What if I find out three weeks after we gave somebody a distribution that they're not a qualified individual, as that term is defined under the CARES Act? Am I on the hook now? Was I allowed to rely on that self-certification?" So it's amazing the types of questions we get either related to the CARES Act or related to situations caused by COVID-19. And that's kind of where the guidance is coming in. How do we keep people in compliance? How do we keep them focused on whether they need the CARES Act provisions or not?
Chris Frank:
Because we have a bunch of clients that aren't really affected, so they didn't add the CARES Act provisions. They were mostly voluntary provisions. They weren't mandatory. So this is what we've been spending our time doing for the last two months. And I'm sure all our adviser partners are doing the same thing too. Because the last thing you want to see is that at the end of 2020, when most of the CARES Act pieces go away, that you only have a shell of the retirement plan you had at the beginning of the year. So there's a lot of back and forth that's required.
Chris Frank:
Now bottom line, if an employer is experiencing financial difficulty. They have to do what's right for that company. I would say that if you're looking at a hierarchy of action steps, chances are you're going to start with things like an employer contribution before you start furloughing or laying off individuals. So if you're suspending or eliminating the employer contribution, that's less money going into the plan. And if you're allowing CRDs and relaxed loan rules, that's more money coming out of the plan. So like I said, at the end of the year, you might see a totally different retirement plan than you had on March 1st.
John Bryson:
Okay. And Ed, in your conversations with clients, what are you talking to them about what they need to know about their options with a 401(k) plan or even their IRAs?
Ed Jastrem:
I think the very first thing that we learned in regards to timing and retirement plans related to the tax filing and payment deadline extension to July 15th, which also pushed the IRA as well as the health savings account contribution deadline for the 2019 tax year, also to July 15th. So for those individuals who are trying to save or would like to save, they got a little bit more time to do so. So they could kick the can down the road a little bit in making their contributions.
Ed Jastrem:
I think that's kind of relatively minor in the grand scheme of things. If we're looking more big picture at those who maybe have lost their jobs or who are small business owners who are worrying about some of the issues that Chris mentioned in terms of do I still fund my retirement plan? Do I still do a profit share? What loan provisions can I amend?
Ed Jastrem:
So some of the things that we've been looking at are the same that Chris mentioned in those ends. In terms of, is there something structurally about a plan that can be amended? Really it's an opportune time for advisors to connect with third party administrators or other experts in those fields to really reestablish those centers of influence to help clients if they haven't already more boots on the ground. Some of the things we've been thinking about are for self-employed individuals who might use a SEP IRA or a solo 401(k), who haven't done their 2019 taxes yet because they haven't had to. And even beyond July, might be on extension until October. If they would otherwise be able to make a contribution to a retirement plan for the 2019 tax year to get a deduction to lower their tax liability. But they're worried about cashflow because of what's been happening really in 2020. Or since maybe March 2020.
Ed Jastrem:
Something that they might consider is making the contribution to get the deduction in 2019. And then if they need to take the money out in 2020, using that CRD, that coronavirus related distribution that Chris mentioned to get the money back. So that might mean not investing the funds within that retirement plan, but potentially using that income tax leverage for some year to year savings, particularly if it looks like 2020 could be a much lower tax burden year than 2019. So that's something that we've been looking at with what those clients.
Ed Jastrem:
For a lot of other clients, considering whether they should take money out or not under the CRD or some other provision. And how might they return the money in the future or not. Something that I've been looking into is for someone who does take that CRD, the tax liability for that withdrawal automatically is spread out over 2020, 2021, and 2022. So three years to pay the tax liability, if any, from taking that CRD.
Ed Jastrem:
You can return funds within those years to basically offset the tax liability. So you would have to more than likely to file an amended tax return. But something that you can do is elect to include all of that tax liability in one year in 2020. So you might want to do that if you knew that income was way down in 2020.
Ed Jastrem:
What I'm not sure of and where I'm waiting for more guidance is when does that election need to be made, and will that be a moving target? So if someone takes distribution from a retirement plan in 2020 using the CRD, and they're doing some income tax projections, they're talking to their business advisors later this year, they're looking at is their business returning to normal or not. Does it make sense to spread that liability out over three years or take a hit in 2020? When does that clock stop kicking? Does that election need to be made by 12/31, by April 15th, by October of next year? I'm not really sure. And I don't know where the guidance will fall on that. So certainly something to be aware of is if someone is thinking about making that election, making sure that they know in the future when that clock stops in terms of at what point do they have to make a decision about the flexibility or not spreading that liability around.
John Bryson:
Okay. So a lot to digest. I would ask both of you, are there any other issues you think investment professionals need to pay attention to that you haven't covered so far?
Ed Jastrem:
We didn't touch on, go ahead Chris. I was going to say we didn't touch on any of the charitable giving aspects of the CARES Act yet. I think that this might be maybe a secondary item. It's tough to talk about charitable giving. Estate state planning strategies. Giving money to the next generation when everyone's really worried about how the market is doing and what's going on in the world. So in practical experience the last few months, charitable giving and some of these other strategies that might be a good time to look at them hasn't necessarily been top of mind for a lot of people. But for those clients that are interested in charitable giving that do have big charitable giving plans, there are a few changes to be aware of.
Ed Jastrem:
The minor change is that there's an above the line deduction for taxpayers now of $300 so that you don't need to itemize on your tax return in order to get that deduction. But big picture $300, not really going to move the needle for anybody.
Ed Jastrem:
The bigger change potentially is that for 2020, for those who do itemize and give to charity. The cap on how much you can deduct is increased. So that the limit on cash gifts to a charity is moved from a maximum of 60% of AGI to 100% of AGI. So in theory, someone could eliminate their tax liability entirely with charitable gifts. So probably a very modest number of clients that might be doing that. But for those who are thinking strategically, that could be an opportune time if someone was planning a large gift. And if it made sense combined with other tax planning goals.
John Bryson:
Great. And Chris, what were you going to add?
Chris Frank:
Yeah, I was just going to say. I think the provision that is still giving everyone a head scratching moment is the required minimum distribution provision. So you had the act waive RMDs for 2020, but you had a bunch of people who took the RMD earlier in the year, because it was technically their 2019 RMD that was allowed to be paid by 4/1 of this year.
Chris Frank:
So there's a lot of back and forth. Well, why did the legislative body waive RMDs? Well they did it because they were afraid that the account balance would be depleted more some than usual because the market had gone down in the first quarter. But the RMD is based on a 12/31 account balance. So why for somebody to take a distribution?
Chris Frank:
Well, there's a big debate in the industry, and Ed's probably been part of it where some people have said, "Well yeah, but people count on this RMD." People 75, 80 were getting an RMD count on getting this RMD and now you're going to what, make them have to go and get it, like make an election? Where another side is saying, "Wait, you mean we don't have to take this distribution? We'd rather keep it in the plan." So there has been some guidance on this where these payments were allowed to be rolled back into the plan or an IRA.
Chris Frank:
So that's I think the provision to me that's still unsettling. And now you've got proposed legislation that might be addressing 2019 RMD payments. And Ed, I don't know if you've seen this with clients regarding what do we do. How do we handle this with our 70 and a half plus participants. Do we make them ask for it? Or do we just give it to them unless they tell us not to give it to them? And how do we treat that particular payment?
Ed Jastrem:
Yeah, certainly you're absolutely right Chris that,] it's a provision that I think is still causing hiccups both on the advisor/client relationship side. And also I'm sure on the operational side for custodians for these accounts.
Ed Jastrem:
Because you're right. What's the default option? Is there a default option? I don't think you can presume that across a client base of hundreds of individuals taking RMDs, what would you elect as the default for them. Would you assume that everyone wants it because they take the income to use for living expenses, or would you assume the opposite? That people don't want to take it, and they prefer to let their account balances recover and not have the income tax liability.
Ed Jastrem:
So on our side from a practical perspective, we've had to make a master list of really every single RMD that would have been processed in 2020, and systematically make a note for every one of those accounts, every one of those clients, if we plan to take it or not.
Ed Jastrem:
So as we are meeting with clients, as we're having conversations with them over Zoom and on the phone or over email. We're denoting really one by one, if the client wants the income and use it for something. Or if we're going to skip it until further notice. So it's certainly something that's added an element of extra planning, time consumption, potentially a distraction from other planning elements. But it could be very important if you're looking at higher net worth individuals, higher asset individuals that have multimillion dollar IRAs, particularly if they're older. RMD could potentially be a major swing element in their financial plan.
Ed Jastrem:
Something that I know that we're looking at as well as other advisors is strategically, if a client doesn't need the RMD income for living expenses, do you effectively skip the RMD? But instead of having it process, do a partial IRA to Roth conversion for some amount less than or equal to what the RMD would have been. So from an income tax perspective, maybe things are approximately the same because your tax liability is the same. But instead of just having money come out of the IRA, you get it into a Roth bucket. So for some clients, that's something to consider between now and end of year as well.
John Bryson:
So guys, last question. As you look forward, and as the playbook kind of evolves, what do you see in terms of new legislation or fiscal support and any final comments for our audience? Chris, maybe I'll start with you.
Chris Frank:
Yeah. So I think right now, everyone's waiting to see if the HEROES Act passes in the Senate. I mean, it went through the house. There seems to be a lot of opposition. It would be an amount greater than the CARES Act. I think they're talking $3 trillion. More direct payments or those economic impact payments, as Ed called them. More support to health workers, hazard pay. Extending the unemployment enhancement.
Chris Frank:
But I think the one that I'm more interested in is this, I'm sorry, SAVERS Act, which has now started in the house. And that is an act aimed at helping people rebuild their savings. So I don't know all the mechanics to it. I'm not sure they're all fleshed out. But you would have a temporary period of time where the normal IRS limits would be enhanced. So I think the number I saw was 300% of the normal limit or 100% of compensation. So it's a chance for people when they finally get back to work or they've been an individual that's had to take a CRD, a chance to add back money to their retirement plan account. And again, it sounds great. The timing on it right now is probably not good because I'm guessing the people that it would help the most are probably the people that are in no position to put extra money into a plan. They're probably trying to get money out of the plan. But I think those are the things that we want to see in the future. How are we going to help people who have had to take advantage of these CARES Act retirement provisions sort of rebuild their savings for the longterm.
John Bryson:
Great. Ed, any final comments from you?
Ed Jastrem:
I think probably just to reiterate how I started in terms of acknowledging that this is a very dynamic situation. Chris just mentioned a handful of things moving their way through Congress that may or may not add even more programs to be aware of. As advisors, I think we need to be conscious of the fact that what we read or interpreted a month ago could be very different or, or have been modified. Even just looking at the SBA website or the programs that are available such as the paycheck protection program, loan forgiveness, emergency loans. That entire site has been expanded and amended dramatically since the PPP first came out. So for anyone advising self-employed or small business owners that have looked into that program or might be considering that program still, if you haven't been to the SBA website recently to check out the new Q&A and the new features to make sure that you're on the same page with the information that's presently available. I think that's important. Even looking at modifying that program of bill passed the house on Thursday on a May 28th. H.R.7010, Paycheck Protection Program Flexibility Act. If you want to take that mouthful. Which would modify the program another time.
Ed Jastrem:
So there's definitely a lot out there. I think all the more reason for advisors to consult with their peers to reach out to those centers of influence, to be in touch with service providers like Hancock that are providing this type of advice and consultation. I think having your ears and eyes wide open so to speak is what's going to set advisors apart the rest of the year, compared to those who aren't doing that.
John Bryson:
Agreed. Well Ed and Chris, I want to thank you both for sharing your insights. It was very thoughtful discussion. To my audience if you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes or visit our website ghinvestments.com to read our viewpoints on macro trends, portfolio construction techniques, business building ideas, and much, much more. Thanks for listening to our show.
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