New Puerto Rico Internal Revenue Code
On January 31, 2011, the Commonwealth of Puerto Rico adopted a new Internal Revenue Code (the 2011 PR Code), which substantially overhauled the tax requirements for retirement plans covering Puerto Rico residents. The majority of the 2011 PR Code plan qualification requirements were modeled after the relevant plan qualification requirements under the United States tax code.
With the exception of a handful of requirements, the 2011 PR Code plan qualification requirements are generally effective January 1, 2011. Both dual-qualified (United States and Puerto Rico) plans and Puerto Rico-only qualified plans, along with other plan-related documents and communications, will need to be amended by December 31, 2011 to reflect the 2011 PR Code requirements.
Beginning on or after January 1, 2012, retirement plans intended to be qualified under the 2011 PR Code must file and obtain a determination letter from the Puerto Rico Department of Treasury (Hacienda) by the due date, including extensions, for filing the plan sponsor's Puerto Rico income tax return for the tax year in which the plan first began covering Puerto Rico participants. Because the availability of retroactive qualification through the regular determination letter process after December 31, 2011 is unclear, existing plans that have not filed for a determination letter with Hacienda or existing plans that have received determination letters from Hacienda but have made subsequent amendments that are not intended to comply with the 2011 PR Code requirements should file for a determination letter no later than December 31, 2011. Hacienda is expected to issue additional guidance on the timing and process for submitting determination letter applications with Hacienda.
NOTE: At the time of publication of this LawFlash, Puerto Rico's legislature is considering a 120-page technical amendments bill that would clarify and amend certain articles of the 2011 PR Code relating to retirement plan qualification requirements. The technical amendments bill is expected to be enacted into law relatively shortly. Plan sponsors are urged to consult with Puerto Rico counsel for compliance with the 2011 PR Code.
Transfers and Spin-offs to Puerto Rico Qualified Plans by December 31, 2011
In Revenue Ruling 2008-40, the IRS clarified that the transfer or spin-off of assets from a dual-qualified (United States and Puerto Rico) plan funded through a U.S. trust to a Puerto Rico-only qualified plan funded through a Puerto Rico trust is generally prohibited and that such a transfer is taxable to affected participants and may jeopardize the U.S. tax-qualified status of the U.S. plan. However, Revenue Rulings 2008-40 and 2011-2 provided a relief period, expiring on December 31, 2011, during which such transfer will be allowed without any adverse tax consequences.
Plan sponsors contemplating such a transfer or spin-off should act quickly in order to accomplish and complete the transfer or spin-off by the December 31, 2011 deadline. Any such transfer after that date will generally be taxable to the Puerto Rico residents participating in the plan and could jeopardize the tax-qualified status of the U.S. plan unless the Puerto Rico transferee plan makes an election to comply with U.S. qualification requirements under ERISA Section 1022(i)(2).
If you have questions about the information in this LawFlash, please contact any of the following Morgan Lewis attorneys:
Chicago
Brian D. Hector
New York
Craig A. Bitman
Philadelphia
Robert L. Abramowitz
Brian J. Dougherty
I. Lee Falk
Vivian S. McCardell
Steven D. Spencer
Pittsburgh
Lisa H. Barton
John G. Ferreira
Lauren Bradbury Licastro
R. Randall Tracht
Washington, D.C.
Althea R. Day
David R. Fuller
Mary B. (Handy) Hevener
Gregory L. Needles