Retirement Account Withdrawals Under the CARES Act

By Camille Smith

With 2020 coming to a close, it is the time for year-end tax planning. Meanwhile, many regions are experiencing a spike in coronavirus cases. To those ends, below is a refresher on some of the retirement related provisions of the CARES Act, passed in March of this year.

Required Minimum Distributions:

If you must generally take a required minimum distribution (RMD), for 2020 you can skip the distribution. This includes both RMD’s for over 70 ½ (72 if born after June 30, 1949) and inherited IRA’s. The distribution waiver applies to defined-contribution retirement plans like 401(k)’s, IRA’s, 403(b)’s. It does not apply to defined-benefit plans (i.e. pension plans). Keep in mind, it may make sense to take your RMD in 2020 or even convert your Traditional IRAs to Roth IRAs.  This should be considered as a part of your 2020 year-end planning.

Coronavirus-related Withdrawal:

If like many people, you have been impacted by the pandemic and need some financial relief, you may be able to use your retirement funds. A qualified individual may withdraw up to $100,000 from his/her eligible retirement plan and receive special tax treatment for the withdrawal.

To be considered a qualified individual, you (or your spouse) must have been diagnosed with the coronavirus or you experienced any of the following financial hardships due to the coronavirus.

  • Quarantine
  • Lay-off or furlough
  • Reduced work hours or reduced pay (including self-employment income)
  • Unable to work due to lack of child-care
  • Job offer rescinded or delayed
  • Your (or your spouse’s) business closed or had reduced hours

If you must take a distribution from your retirement account(s) due to Covid-19, the distribution is still subject to income taxes, but you can pay the taxes over three years (⅓ each year). You can also elect to pay the related income taxes in the first year. The distribution is not subject to the usual mandatory tax withholding. This withdrawal must be taken by 12/31/20.

If you are under the age of 59 ½, the additional 10% excise tax on early withdrawals is waived for coronavirus-related distributions.

Lastly, you may be able to repay the distribution back to your retirement account within three years and it would be treated as a rollover. In this case, you could claim a refund for any taxes you already paid on the withdrawal.

While taking a distribution from your retirement account may provide much needed relief, keep in mind that you will lose the tax deferred investment growth on any funds withdrawn.

For an in-depth review of the rules and requirements, see IRS Notice 2020-50 or the IRS Q&A. As with most things tax related, the rules are complex and we recommend that you consult your tax advisor.

Paycheck Protection Program Loan Forgiveness Updates – November 2020

By Billy Litz, CPA

The Small Business Administration (SBA) and the U.S. Treasury Department recently released a simplified two-page loan forgiveness application and issued an Interim Final Rule (IFR) for recipients of Paycheck Protection Program (PPP) loans of $50,000 or less. The IFR provides new guidance concerning forgiveness and loan review processes. Below are some highlights of this issuance:

    • You are no longer required to reduce forgiveness if you reduce the wages of employees during the loan cover period compared to the reference period.
    • Your paycheck protection loan forgiveness will not be reduced if you reduce the number of full-time equivalent employees.
    • Borrowers that use the new form aren’t required to show the calculations used to determine their loan forgiveness amount.
    • The new form requires less documentation – borrowers that use the new forms are advised to keep all documentation relating to their PPP loan but are not required to submit all of the materials with their application.

( IFR link ––IFR–Additional-Revisions-Loan-Forgiveness-Loan-Review-Procedures-Interim-Final-Rules.pdf )

Which Forgiveness application should you use?

There are now three different PPP forgiveness application forms, each with its own set of instructions. They are:

    • Form 3508S – Designed for borrowers with $50,000 or less in loans- So long as the total loan amount is under $2 million in aggregate with affiliates.

Form 3508S Application

Form 3508S Instructions

    • Form 3508 – All borrowers can use this form:

Form 3508 Application

Form 3508 Instructions

    • Form 3508 EZ – Borrowers must satisfy one of the following criteria to use the EZ form:
      • Self Employed Individuals, Independent contractors, or self-proprietors who had no employees at the time of the PPP loan application OR
      • Did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period or alternative payroll covered period and did not reduce the number of employees between January 1st, 2020, and the end of the covered period OR
      • Did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period or the alternative covered period AND was unable to operate during the covered period at the same level of business activity as before February 15, 2020, to compliance with Covid-19 requirements or guidance.

Application for Form 3508 EZ

Instructions for Form 3508 EZ

When are the applications due?

All three PPP Loan forgiveness applications displayed an expiration date of 10/31/2020, which caused some confusion. Based on the FAQ (click here to read), the borrowers may submit the application any time before the maturity date of the loan. However, if a borrower does not apply for forgiveness within 10 months after the end of their covered period, the borrower must begin making payments on their loan.

Loan Necessity Questionnaire

Additionally, the SBA (via lenders) has begun to issue a PPP Loan Necessity Questionnaire to businesses that received PPP loans over $2 million. The questionnaire will be used by SBA loan reviewers to evaluate the good-faith certification that these businesses made on their applications regarding the necessity of the loan due to economic uncertainty. For those businesses that receive this questionnaire, it is due (along with supporting documentation) within 10 business days from receipt from the lender.

As always, if you have any questions about the Paycheck Protection Program Loan, or your loan forgiveness calculation, please do not hesitate to reach out.

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.

Saving for Health Related Items in a Health Savings Account (HSA)

By Alexandre Ptaszynski

A Health Savings Account (HSA), is an account that can be established to pay for certain current or future healthcare expenses, provided you are currently enrolled in a High Deductible Health Plan (HDHP). An HDHP that combines traditional health insurance coverage with an HSA provides a tax free way of saving for healthcare expenses. Compared to a traditional HMO, an HDHP/HSA combination will have lower monthly premiums, but a higher yearly deductible. Essentially, this means that HDHP members will pay less in monthly premiums, but will pay more when they need to access healthcare.

As mentioned previously, being enrolled in an HDHP is a prerequisite to opening an HSA. Depending on your age and health, being eligible to open an HSA could be a major incentive for switching from a traditional HMO to an HDHP. Here are some of the advantages of using an HSA to save for health related items:

  • HSAs can provide significant tax savings to the account owner. Some of which are:
    • HSA contributions are made on a pre-tax basis.
    • Money contributed to an HSA can be invested and the earnings are tax free.
    • HSA distributions used to pay for qualified medical expenses are non-taxable.
  • Once the account owner reaches the age of 65, they can use the HSA funds for non-medical expenses and not pay any withdrawal penalties (although income tax may be assessed on earnings).
  • Unlike a flexible spending account, unused funds roll forward year after year. There is no minimum spending requirement or penalty for letting your savings accumulate.
  • Since HSA contributions made through payroll are not subject to FICA, many employers offer yearly contribution matches or incentives to account owners who open HSAs. During your next open enrollment period, check with your employer to see if they offer an HSA contribution match.

Single coverage HSA owners are allowed to contribute a maximum of $3,550 in 2020 and $3,600 in 2021. Family coverage HSA owners are allowed to contribute a maximum of $7,100 in 2020 and $7,200 in 2021. Additionally, individuals over the age of 55 may make extra “catch-up” contributions of up to $1,000 per year.

This example should display the savings that an HSA provides. Let’s say you are a single and relatively healthy taxpayer in a 24% tax bracket who spends an average of $600 per year on healthcare expenses.

HDHP with HSA Traditional HMO
Yearly Premiums $1,200 $2,700
Amount towards Annual Deductible/Co Pays $   600 $   150
Employee Contributions to H.S.A. used to pay for deductible/co pays $1,650 $   –
Total cost of premiums & H.S.A. contribution/ Premium & Co Pays for HMO $2,850 $2,850
Tax Savings on Premiums $   380 $   855
Tax Savings on HSA Contribution $   522 $   –
Employer Contribution to HSA $   300 $   –
Total Benefits $1,202 $   855
Total cost net of tax $1,648 $1,995
HSA Balance
Individual Contribution $1,650 $   –
Employer Contribution $   300 $   –
Less Health Expenditures $ (600) $   –
Ending HSA Balance $1,350 $   –

As you can see, the HDHP with HSA premiums not only costs less, but if you contribute roughly half the maximum amount to your HSA you will still have $1,350 of tax free money in your account at the end of the year. That money can be invested through your HSA provider with tax free growth or used on medical expenses the following year. Remember, there are no spending minimums and your savings will continue to roll over year after year with no penalties.

If you have any questions regarding how to set up or fund an HSA, as well as any questions or concerns regarding HDHPs and HSAs in general, please contact your tax professional.

Section 139 Payments – Another Way to Help Employees During the Pandemic

By Mandy Lam

Not only has COVID-19 had a profound impact on public health, but also on the economy – locally, nationally and globally. With no end in sight, employers can look to Section 139 of the Internal Revenue Code as a way to provide tax-free supplemental assistance to employees.

On March 13, 2020, President Trump officially declared the US outbreak of COVID-19 to be a national emergency thereby allowing employers to make tax exempt “qualified disaster relief payments” to employees under Section 139. Qualified disaster relief payments include amounts paid to (or for the benefit of) an individual to reimburse or pay personal, family, living, or funeral expenses that are incurred as a result of a qualified disaster. Note that qualified disaster relief payments, however, do not include: (i) payments for expenses that are otherwise paid for by insurance or other reimbursements; or (ii) income replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation.

Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees in the aggregate. In addition, the payments remain fully deductible for employers despite not being taxable to the recipients. There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.

Many of the requirements that exist for other types of benefits aren’t explicitly mandated for Section 139 payments. Section 139 doesn’t require a written plan, and it doesn’t have specific documentation or anti-discrimination requirements. Nonetheless, we encourage employers to maintain documentation to support reasonable payments.

Employers may consider the following in their disaster relief payment program:

  • Which employees are eligible to receive qualified disaster relief payments (i.e.: full time employees, number of years of service, etc.)
  • The type of expenses that are reimbursable (i.e.: expenses incurred to allow the employee to work from home, medical expenses not covered by insurance, etc.)
  • A dollar limit the employer imposes on Section 139 payments
  • The duration of the qualified disaster relief payments

Section 139 benefits won’t be practical for all employers, but it can be a useful part of your company’s response to COVID-19. If you’d like to discuss this or other financial strategies related to the pandemic, please feel free to contact us.

Frequently Asked Questions on PPP Loan Forgiveness

For answers to frequently asked questions on PPP Loan Forgiveness, click here.

How to Manage Your Paycheck Protection Program (PPP) Loan

Snyder Cohn’s Barbara Murphy Kromer joined other leaders to discuss how businesses can manage their Paycheck Protection Program (PPP) loan during these turbulent times.

Thank you, Small Business Network and Kelly Leonard for organizing the monthly morning sessions and addressing topics of interest to small business owners in Montgomery County, MD.

Click on the link below to watch the video of their discussion.

PPP Loan Forgiveness Gets EZ (Relatively Speaking)

By Greg Yoder

Note: Unless there’s further Congressional action, the loan portion of the Paycheck Protection Program is about to close. The deadline for applications is June 30th.

The SBA — in an effort to ease the PPP-related administrative burden — has released a new PPP loan forgiveness application: Form 3508EZ. This two-page application has many fewer calculations and requires less documentation from borrowers than the original Form 3508.

In order to use the EZ, borrowers must meet one of the following three criteria (taken from the SBA instructions):

  • 1. The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).
  • 2. The Borrower did not reduce annual salary or hourly wages of any employee making less than $100,000 per year by more than 25 percent during the Covered Period compared to the period between January 1, 2020 and March 31, 2020; AND
    The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.
  • 3. The Borrower did not reduce annual salary or hourly wages of any employee making less than $100,000 per year by more than 25 percent during the Covered Period compared to the period between January 1, 2020 and March 31, 2020; AND
    The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with guidance issued by [various government agences] related to COVID-19.

“Covered Period” in the above criteria means either the original 8-week period or the recently expanded 24-week period, in either case beginning with the date the loan proceeds were disbursed.

The 60% rule (payroll cost must make up at least 60% of the forgivable costs) is still included in the application, but in a simplified form. There had previously been some concern that businesses that did not have qualifying payroll costs equaling at least 60% of their loan amount would not get any forgiveness. The SBA has clarified that this is not the case: businesses that don’t meet the 60% threshold will have their forgiveness reduced, but not eliminated.

Because of the extension of the covered period from 8 to 24 weeks, the maximum amount of compensation for an individual employee that qualifies for loan forgiveness has also increased. For non-owner employees, the maximum is now $46,154, the 24-week equivalent of a $100K annual salary. For owners, however, the maximum amount of compensation is 2.5 months’ worth of $100K of compensation, or $20,833. For non-owner employees, the costs of health insurance and some other benefits are also forgivable and are not subject to the same dollar limitations. The $20,833 for owners is inclusive of all costs, so that an owner making more than $100K per year will not get any additional forgiveness for their benefits costs.

Note that if a business chooses to stick with the original 8-week covered period, it will still have to use the original, lower compensation limit of no more than $15,385 per employee.

Links for the 3508EZ:



Disclaimer: Please note this article is based on the information that is currently available and is subject to change.

Paycheck Protection Program Flexibility Act of 2020

By Greg Yoder

Congress has just passed new legislation significantly liberalizing the loan forgiveness provisions of the Paycheck Protection Program (PPP) established by the CARES Act.

In response to the continuing COVID-19 situation and the concerns of many businesses about the difficulty of navigating the existing forgiveness provisions, the House passed legislation late last week. Last night, the Senate passed the House version without changes, and the President is expected to sign the bill into law later today.

Major provisions of the bill:

  • The “covered period” has been extended from eight to twenty-four weeks from the date of loan origination, or December 31, 2020, whichever is earlier. Current PPP borrowers can either use the new extended covered period or keep their original eight-week period. This means that businesses now have three times as long to incur and/or pay expenses that are eligible for loan forgiveness.
  • The minimum proportion of the loan forgiveness amount that must be used for payroll costs has been reduced from 75% to 60%. However, borrowers who do not have covered period payroll costs totaling at least 60% of the loan amount will not be eligible for any forgiveness.
  • Businesses that receive PPP loans are now eligible for the other payroll tax deferral provisions of CARES. (Previously, once your PPP loan was forgiven you couldn’t defer payment of payroll taxes.)
  • Loan recipients who don’t apply for forgiveness will have ten months from the end of the covered period to begin making payments on the loan.
  • Employers will have until December 31 (rather than June 30) to restore employee salaries and FTEs to prior levels to avoid a reduction in forgiveness.
  • The bill provides additional exceptions for businesses that can’t fully restore staffing levels because of an inability to hire or because of an inability to fully resume operations because of complying with COVID-19 safety orders.

For a lot of businesses, the major takeaway from the new legislation will be that their eligible payroll costs during the covered period will now exceed the loan amount, and the entire loan amount can be forgiven without having to consider other eligible costs. The other practical effect is that employers will have an additional sixteen weeks before they begin the complex loan forgiveness application process.

The current legislation likely isn’t the last Congressional action we’ll see in response to the pandemic. Additionally, there are still a number of areas where we’re awaiting clarification from the SBA on other PPP matters. We’ll be back with more updates.

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.

PPP Update – Forgiveness Matters

By Greg Yoder

The SBA has released its loan forgiveness application for the Paycheck Protection Program (PPP). The application is accompanied by instructions that give additional guidance and resolve some (not all) of the questions regarding how to calculate the loan forgiveness amount. There’s a lot of information to digest in the new releases; this article covers some of the highlights.

Alternate Payroll Covered Period. Under CARES, the “Covered Period” was defined as the eight-week period beginning with the date the PPP loan was disbursed. For administrative convenience, employers who use biweekly or weekly payroll may elect to use the “Alternate Payroll Covered Period.” This period is the eight-week period that begins on the first day of the first pay period after the loan disbursement date. It’s important to understand that the alternate period applies only to payroll costs. Non-payroll costs still have to be determined using the Covered Period.1

Paid or incurred. Payroll costs will be counted towards the loan forgiveness amount if they’re paid during the covered period OR if they’re incurred during the covered period and paid on or before the next payroll date. The payroll cost for an employee is incurred when the employee’s pay is earned. Non-payroll costs that are incurred during the covered period can be included as long as they’re paid by the next regular billing date.

The wording in the application also implies that non-wage payroll costs can be included when paid even if they aren’t incurred during the covered period. In other words, there may be an opportunity to increase eligible payroll costs by prepaying costs such as health insurance and retirement plan contributions for employees. It’s not clear whether the SBA actually intended to allow loan forgiveness for amounts that were paid but not incurred during the covered period, and we expect that there may be additional guidance on this issue in the coming months, so we are advising clients to proceed with caution. There is also some indication that health insurance contributions for the owners of some businesses may have to be included in the base compensation amount, which is limited to $15,385 per person in the covered period. This is another area where we’re not certain of SBA’s intent, and we expect additional guidance.

FTE determination. In order to avoid a reduction in loan forgiveness, an employer generally has to maintain the same number of full-time equivalent (FTE) employees during the covered period as they had during a prior reference period. Under the instructions in the application, total FTEs are determined by calculating an FTE for each individual employee and then adding the individual amounts up. For an individual employee, the FTE is calculated by determining the employee’s average hours worked per week and dividing by 40. The result is calculated to one decimal place, and it’s capped at 1.0 for any individual employee: overtime doesn’t count.

The instructions also provide for a simplified method where any employee who works less than 40 hours/week is counted as 0.5 FTE. Whichever method is used for calculating FTEs during the covered period must also be used for calculating FTEs during the employer’s chosen reference period. The application includes a “Schedule A Worksheet” that’s used to calculate both FTEs and employee compensation during the covered period.

Certain former employees may continue to be counted as FTEs even if they are no longer employed or fully employed. These include employees who voluntarily resigned, were fired for cause, or voluntarily requested a reduction in hours. In addition, if the employer attempted to rehire an employee (a “good-faith, written offer”), and the employee refused the offer, that employee can be counted towards the total FTEs, provided they haven’t already been replaced.

FTE Reduction Safe Harbor. As a general rule, employers calculate a ratio of FTEs during the covered period to FTEs during their chosen reference period. If this ratio is less than one, the loan forgiveness amount is reduced. However, if they meet the FTE Reduction Safe Harbor, they aren’t subject to this particular reduction. The safe harbor is also addressed on the Schedule A Worksheet.

To meet the safe harbor, employers have to do three separate calculations of FTEs:

      (A) Their average FTEs for the period from February 15, 2020 through April 26, 2020;
      (B) Their FTEs during the pay period that includes February 15, 2020; and
      (C) The FTEs as of June 30, 2020.

Each calculation must use the same method. In order for the safe harbor to apply, two requirements must be met. First, (A) has to be less than (B). In other words, there must have been a reduction in workforce after February 15. Second, (C) must be greater than or equal to (B); i.e., the workforce level must have rebounded by June 30.

Keep in mind that a reduction in staffing levels is only one way that the loan forgiveness amount gets reduced. In order to get the full forgiveness amount, employers also have to avoid having a reduction in compensation. If any individual employee’s compensation during the covered period is less than 75% of that same employee’s compensation during the reference period, there may be a reduction. Also, the loan forgiveness amount can’t be more than the qualifying payroll costs divided by 75%. In effect, this limitation means that any time payroll costs aren’t at least 75% of the PPP loan amount, the amount forgiven will be less than the full amount of the loan.

Additional Non-Payroll Costs. The application expands “covered mortgage obligations” to include any debt-secured business property, not just real property. This means that the interest (not the principal) paid during the covered property on a loan secured by business personal property can also be included in covered non-payroll costs. Similarly, the instructions include business property in “covered rent obligations,” which appears to mean that lease payments on business equipment are also covered costs.

There’s a lot more to the application and instructions than we’ve covered here, and we expect additional guidance on some of the issues that remain open. The application and instructions themselves are at–paycheck-protection-program-loan-forgiveness-application. In addition, the SBA regularly updates and expands its PPP FAQ, and you can find that information at–faq-lenders-borrowers. We look forward to assisting clients with maximizing their loan forgiveness under the PPP, and we welcome all of your questions.

1 Throughout this article, “covered period” refers to either the Covered Period or the Alternate Payroll Covered Period for payroll costs and the Covered Period for non-payroll costs.

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.

PPP Forgiveness Guidance is Here!

Since the CARES Act passed March 27, 2020, we have been advising clients how to apply for and how to obtain forgiveness from their PPP (Paycheck Protection Program) loans. The uncertainty, particularly surrounding forgiveness rules, has been challenging. This past weekend, the SBA published the application and instructions for the forgiveness, and although lengthy, they provide many answers. As we continue to advise you, we expect to provide updates, but for now, please click here for the PPP Forgiveness Application and instructions. Of course, please don’t hesitate to contact your Snyder Cohn partner with any questions.