As Women’s History Month, March is a time for joyful celebration of women’s contributions to American history. This year, however, the pandemic’s impact on women’s finances has given us a sobering reason to pause and recognize women’s sacrifices. It’s clear that COVID-19 has had a disproportionate and negative effect on women, particularly women of color, and their households’ cash flow.
Over the past year, women lost or scaled back their careers in large numbers. Despite making up 39 percent of the global workforce, women experienced 54 percent of the total pandemic-related job losses, according to a McKinsey & Co. report. Between January 2020 and January 2021, the unemployment rate for women age 20 and older jumped from 3.4 percent to 6 percent.
Vaccines bring hope for how the rest of 2021 will shake out, but their effect is unlikely to quickly reverse the hits to some women’s earnings. This is the kind of difficult period when a financial planner’s help can be the most valuable. Your advice on unemployment compensation, health care, social security, and retirement savings can help stabilize the immediate cash flow and long-term financial security of your women clients.
Here are some ways to address your clients’ immediate concerns and show them how the decisions they make today will affect their financial future.
Minimizing Tax Surprises
Many people, women and men alike, need help understanding unemployment benefits. You may have clients who were surprised to learn (via Form 1099-G, Certain Government Payments) that their unemployment compensation would be taxable, including the additional weekly $600 authorized by the CARES Act. At the state level, only five states that tax income—California, Montana, New Jersey, Pennsylvania, and Virginia—do not tax unemployment benefits.
How can you help clients minimize tax surprises? If they will continue to receive unemployment payments in 2021, there’s a simple solution. Suggest they complete Form W-4V to voluntarily withhold taxes from their unemployment benefits. The withholding rate is a flat 10 percent.
Clients who supplemented their cash flow with coronavirus-related distributions from an IRA or other retirement plan, such as a 401(k), have more complex choices to consider. To help them make the right decision, inform them of the following options:
The full amount of the distribution may be reported as income in the year it’s distributed or reported in one-third increments over three years. This choice is irrevocable, so it requires careful consideration.
Alternatively, individuals have a three-year window that begins the day after they receive this distribution to recontribute all or a portion of it to a retirement plan or IRA.
Individuals who already reported a coronavirus-related distribution on a return can claim a refund for the income tax paid in a prior year.
Securing Health Care
Finding health insurance can be the biggest immediate worry after losing a job, especially for single mothers who can’t rely on a spouse’s coverage. Fortunately, there are several options. Clients may not be aware of their potential eligibility for Medicaid coverage, especially if they live in one of the 39 states that recently expanded the Medicaid program. Alternatively, the Affordable Care Act’s (ACA) Health Insurance Marketplace provides all Americans with nationwide access to health insurance.
For those who missed the fall open enrollment period for ACA insurance or who want to make changes to their plan, the federal government is holding an extra open enrollment period through May 15, 2021. State-based marketplaces are another option in California, Colorado, Connecticut, Idaho, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Washington, and the District of Columbia. You’ll need to check each state’s enrollment timeline. If a client loses her job after May 15, she will still have a 60-day special enrollment period to find health insurance on either the federal or state marketplace. Marketplaces have links to information about eligibility for premium subsidies and assistance for selecting the right plan.
Another (but more expensive) option is COBRA. Your client could be covered by this plan—and keep the health insurance policy she had while employed—for 18 months after a layoff or reduction in work hours. Unfortunately, COBRA coverage could cost up to 102 percent of the health plan’s full premium during that time.
Other options, such as short-term health plans, which can be used for up to 36 months, may offer only limited benefits. Unlike the ACA plans, short-terms plans are not required to provide the following 10 essential health benefits:
Mental health and substance use disorder services
Maternity and newborn care
Ambulatory patient services
Preventative and wellness services and chronic disease management
Pediatric services, including vision and dental care
Insufficient coverage for any of these health care needs could expose your clients to bills that will ruin their family’s financial security for years. Addressing this issue with your clients is an important part of helping them cope with the pandemic’s impact on women’s finances.
Readjusting Career Goals
Women who are still working but fraying from COVID-19’s burden may have more long-term planning considerations. The Women in the Workplace 2020 report from McKinsey and Lean In highlighted several structural factors causing one in four women to either downshift their career or stop working altogether. The rate of women participating in the labor force dropped to 1987 levels in February, according to the Federal Reserve Bank of St. Louis. Why? Among the primary culprits, according to the McKinsey report, are concerns that employers view caregivers of children and adult parents as not fully committed to their jobs.
As an advisor, you can help clients understand how shifting priorities and changing a career path to meet a present problem will affect future social security benefits, retirement security, and a household’s net worth. Social security retirement benefits are based on an individual’s primary insurance amount (PIA). The PIA is calculated from a client’s average indexed monthly earnings during the 35 highest earning years. Social security records a zero for each year that a client did not earn income. More zeros, especially during the primary earning years after age 40, can reduce a client’s PIA and cannot be recouped through later employment. Although a client may think her absence from the workforce will be temporary, it may lead to an extended time away from employment.
It's important for your women clients in career transition to know the ways they can still save for retirement. For instance, they can contribute to a spousal traditional or Roth IRA if they are married, file a joint income tax return, and have a modified adjusted gross income (MAGI) below the threshold set for that tax year. If a client is older than 50, she can make an extra $1,000 catch-up contribution, as long as her MAGI is below the annual threshold. The amount clients can contribute to a spousal IRA will begin to phase out within certain MAGI ranges, and it will end once MAGI exceeds an annual specified limit. Spousal IRAs are available for all married couples, including same-sex unions.
Planning for Post-COVID-19 Life
In a normal year, we could center our attention on progress during Women’s History Month. Of course, we’re not in normal times. As you work with women clients who have been deeply affected by the pandemic, you can provide valuable support and advice. Discussing the topics of unemployment compensation, health care, social security, and retirement savings is vital to navigating the pandemic’s impact on women’s finances.
Editor's Note: Next Wednesday, to celebrate Women's History Month, we're kicking off a new series of advisor interviews, "The Valiant Women of Commonwealth." Be sure to check back. You won't want to miss these fresh insights!
This material is for educational purposes only and is not intended to provide specific advice.