Phase 3 COVID-19 Stimulus Bill Overview – CARES Act Details

Insight by

The Cowen Insight

  • ~$2.2T Phase 3 stimulus/disaster relief bill passes Senate (closer to $6.5T w/ Fed leverage), eg ~35% of US GDP
  • House to pass tomorrow (promised 24 hours to “read” bill before vote) 
  • Bill in 2 buckets: ~60% cash/tax relief/spending & ~40% lender of last resort
  • Congress to leave until April 20, though Phase 4 stimulus already being debated
  • Cash payments may not arrive until April 6 at earliest

Senate passed 883-page Phase 3 COVID-19 bill 96-0. House will pass tomorrow by voice vote (start process at 9 am). The bill (CARES Act) is hereThis is the third COVID-19 related piece of legislation the Congress will have passed in 21 days. This is unprecedented in size, scope, and speed.

5 Major Buckets of CARES Act (in our minds):

1) ~$500B in Cash Payments/Tax Relief 

Recovery checks for individuals: U.S. residents with AGI up to $75K ($150K for married couples) get $1,200 ($2,400 for couples) “rebate” payment. Also eligible for additional $500 per child.  The IRS will base these amounts on the taxpayer’s 2019 tax return if filed, or their 2018 return. The IRS will issue these payments via direct deposit for those who file taxes electronically and via check for those who don’t file electronically.  

Tax relief includes:

  • Delay of payment of the employer’s share of Social Security payroll taxes that would have otherwise been owed from the date of enactment of the legislation through December 31, 2020.  
  • Employee retention tax credit for employers subject to closure due to COVID-19.  Eligible employers will receive a 50% credit on qualified wages against their employment taxes for each quarter, with any excess credits eligible for refunds. An eligible employer is one with operations suspended by orders issued in response to COVID-19 or has suffered a significant decline (more than 50% decrease year over year) in gross receipts during the quarters that begin with the quarter in which gross receipts declined by more than 50% and ending with the quarter in which gross receipts have recovered by more than 80%.
  • Rollbacks on net operating loss (NOL) limitations
  • Modification of credit for prior year minimum tax liability for corporations
  • Taxpayers will be able to deduct more interest expense because the limitation will be temporarily increased for 2019 and 2020 to 50% of a taxpayers’ ATI (normally 30%)
  • Retailers, restaurateurs and hotels will be able to immediately deduct from their taxes what they spend on property improvements
  • Distilled Spirits. Taxpayers subject to the excise tax on distilled spirits will be exempted for distilled spirits removed in 2020 and used in or contained in hand sanitizer produced and distributed in response to the SARS-CoV2 or COVID-19.
  • Charitable Contributions. Modification of limitations on charitable contributions during 2020 will allow corporate taxpayers to deduct more of their charitable contributions by increasing the taxable income limitation from 10% to 25%. Individuals will be permitted to deduct up to $300 of cash contributions, regardless of whether they itemize their deductions. 
  • Retirement Accounts. Consistent with past disaster-related legislation, the draft would waive early withdrawal penalties on coronavirus-related distributions from qualified retirement accounts up to $100,000. It would allow tax payments on distributions to be spread out over three years and would allow individuals to return distributions to the retirement account over three years, with such redeposits not subject to annual contribution limits. The bill also provides flexibility for loans from certain retirement plans. The bill also waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
  • Pension Relief. The bill provides limited relief for single employer defined benefit pension plans. Plans could delay contributions otherwise due during 2020 until January 1, 2021. At that time, the delayed contributions would be due with interest. The bill also provides that a plan’s funded status for purposes of calculating benefit restrictions would be determined as of December 31, 2019 throughout 2020.

Aside from the tax provisions listed above, there are a number of changes to Dodd-Frank and other banking and accounting rules, designed to afford relief and help extend credit during the pandemic. For greater detail please contact your Cowen representative to access Cowen WRG Financials Policy Analyst Jaret Seiberg’s note “Stimulus Package: Dissecting Expected Key Provisions for Financials and Housing.”

2) $300B+ Social Safety Net Enhancements (including $260B emergency unemployment insurance)

  • $260B Emergency Unemployment Insurance. Includes extra weeks of coverage for people who have exhausted existing benefits. Also covers part-time, self-employed, gig economy workers. Weekly benefit increase of up to $600. People who are unemployed would get an extra $600 per week for up to four months, on top of state unemployment benefits to make up for 100 percent of lost wages. 
  • $25B Food Assistance. Nearly $25B for food assistance, including $16B for SNAP and $9B for child nutrition. 
  • ~$24B for Ranchers & Farmers. $14B from CCC that gives USDA wide discretion to use to stabilize the farm economy (this is fund used from the earlier farm bailouts to alleviate the trade wars). Another $9.5 billion would be set aside for emergency aid for the agriculture sector, including cattle ranchers and fresh fruit and vegetable growers.

3) $340B Medical Surge & More Spending. Highlights include:

  • $117B for Hospitals & Vets Health Care
  • $45B for FEMA Disaster Relief Fund
  • $16B for Strategic National Stockpile
  • $11B for Vaccines, Therapeutics & Diagnostics

4) $500B Loan Facility ($425B Exchange Stabilization Fund and $75B for targeted industries including airlines)

  • For corporate lending, the Fed in its programs on Monday concluded that it could lose $1 for every $10 invested. So $425 billion from Treasury can turn into $4.25 trillion in Federal Reserve credit. This works like a bank: Treasury injects $1 and the Fed as a bank can lend $10.
  • This means the overall stimulus price-tag for this bill is ~$4.25T more than the advertised sticker price. That is kind of a big deal.
  • Buyback, dividend, employee retention & exec comp limitations

5) $350B Small Business Loans – some can be forgiven if company retains workers; $17B to help repay existing loans

Other items to flag (and probably a lot more once we can fully digest the bill):

  • REAL ID. Extends federal deadline for people getting driver’s licenses with enhanced security features, called REAL ID, from Oct. 1, 2020, to Sept. 30, 2021. 
  • $31B for Education. Includes $13.5 billion for states to distribute to local schools and programs, $14 billion to help universities and colleges. 
  • Elections. $400 million to help states prepare for 2020 elections with steps including expanded vote by mail, additional polling locations. 

Items not included (possible in Phase 4): individual payroll tax, clean energy tax breaks, infrastructure, crude oil purchases, minimum wage increase, business interruption insurance, industry-specific aid, MA risk corridors

Possible in Phase 5: export controls & supply chain regulations: Fortress/Factory North America (tax incentives to re-onshore supply chains in US).

For the full report, please contact your Cowen representative.

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COVID-19: Update on the Federal Government’s Healthcare Response

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