According to U.S. News & World Report, estimates for the cost of Hurricane Harvey’s damage have come in as high as $190 billion, and damage estimates for Hurricane Irma are still rolling in but range up to $100 billion. To assist taxpayers affected by these devastating storms, the Internal Revenue Service, Department of Labor, and Pension Benefit Guaranty Corporation have granted multiple forms of relief to taxpayers impacted by Hurricane Harvey, Hurricane Irma, and other disasters enumerated by the Federal Emergency Management Agency.
The Commonwealth of Puerto Rico recently adopted a new Internal Revenue Code (PR Code) that contains numerous changes to sections governing qualified retirement plans. The new PR Code will require significant changes to documents and administration for both dual-qualified plans (i.e., plans qualified under both the U.S. and Puerto Rico Internal Revenue Codes) and Puerto Rico-only qualified retirement plans. Many of the changes are effective in 2011.
In general, the new qualified retirement plan provisions in the PR Code make changes to more closely mirror provisions applicable to U.S. qualified retirement plans. For example, qualified retirement plans in Puerto Rico are now subject to annual benefit and contribution limits similar to limits under Section 415 of the U.S. Code and annual compensation limits similar to limits under Section 401(a)(17) of the U.S. Code. However, the PR Code continues to have significant differences from the U.S. Code with respect to qualified plans. For example, limits on deferred contributions and catch-up contributions to a cash or deferred arrangement continue to be lower than the limits under the U.S. Code. In addition, although the definition of highly compensated employee for nondiscrimination testing purposes is now much more similar to the definition under the U.S. Code, it still has some significant differences from the definition applicable to U.S. qualified plans. The new PR Code also still does not permit all U.S. plan design options, such as Roth-type contributions, nor does it specifically address other U.S. plan features such as pass-through of dividends from employee stock ownership plans.
Sponsors of both dual-qualified and Puerto Rico-only qualified retirement plans should begin working with advisors to update plan documents and administration for compliance with the new PR Code as soon as possible. For more details on specific plan implications of the new PR Code, see New Puerto Rico Tax Code Means Significant Changes to Retirement Plans for Puerto Rico Employees.
In addition, sponsors of both dual-qualified and Puerto Rico-only qualified plans should continue to keep in mind potential restrictions on participation in U.S. group and master trusts following the end of the transition period announced in IRS Revenue Ruling 2011-1. For more information on Puerto Rico plan participation in U.S. group and master trusts, see IRS Permits Puerto Rico-Qualified Plans to Participate in U.S. Group and Master Trusts for Transition Period, Extends Deadline for Puerto Rico Spin-Offs.
On December 16, 2010, the U.S. Internal Revenue Service (IRS) issued Revenue Ruling 2011-1, which permits employers sponsoring employee retirement plans that are tax-qualified only in Puerto Rico to continue to pool assets with U.S. qualified plans in group and master trusts, described in Revenue Ruling 81-100, until further notice. Revenue Ruling 2011-1 also extends the deadline previously provided in Revenue Ruling 2008-40 from December 31, 2010 to December 31, 2011 for sponsors of retirement plans qualified in both the U.S. and Puerto Rico to spin off and transfer assets attributable to Puerto Rico employees to Puerto Rico-only qualified plans.
The ruling provides Puerto Rico plan sponsors, institutional investors and trustees with certainty that plans qualified only in Puerto Rico can continue to participate in U.S. group and master trusts until further notice, without facing potential disqualification of the participating U.S. plans and trusts. However, the ruling only provides transition relief. Permanent relief is needed to allow Puerto Rico-only plans to continue to pool assets with U.S. plans in group and master trusts. Employers that sponsor Puerto Rico-only qualified retirement plans should consider efforts to convince the IRS of the importance of group and master trusts in the administration of Puerto Rico-qualified retirement plans.
The ruling also gives plan sponsors additional time to consider the pros and cons of transferring assets from dual-qualified plans to Puerto Rico-only qualified plans under Revenue Ruling 2008-40.
For more information on the impact of Revenue Ruling 2011-1 on employers sponsoring Puerto Rico tax-qualified retirement plans click here.
On November 15, 2010, representatives from a number of law firms (including McDermott, Will & Emery LLP) and trade associations sent a letter to the Internal Revenue Service (IRS) asking that the IRS clarify its position on the treatment of Puerto Rico-qualified plans under Revenue Ruling 81-100. The letter was sent following the publication of a September 14, 2010 letter from the IRS to Senator Arlen Spector, which suggested that the assets from a Puerto Rico-qualified plan cannot be invested with the assets of a U.S.-qualified plan without disqualifying the U.S. plan and trust. The IRS’s position in the letter to Senator Spector was contrary to their position in numerous prior private letter rulings. This position also was not articulated in Revenue Ruling 2008-40, which provides a transition period that ends on December 31, 2010 for plan sponsors to transfer benefits from a dual-qualified plan to a Puerto Rico-only qualified plan.
The IRS’s position on this issue is critical for employers that sponsor qualified plans for Puerto Rico employees. Many plan sponsors participate in, or would like to participate in, investment funds that pool Puerto Rico and U.S. qualified plan assets in group trust or master trust arrangements that have been called into question by the IRS. Puerto Rico retirement plan assets are often too small to meet minimum investment requirements and cannot obtain the same investments at the same costs as U.S. qualified plans. Due to the uncertainty, we’ve seen institutional investment sponsors prevent Puerto Rico retirement plans from participating in investments maintained by group trusts, resulting in Puerto Rico employees having fewer investment options and higher fees for their retirement plan. Sponsors of dual-qualified plans may also have delayed spinning of plan benefits from dual-qualified plans to Puerto Rico-only qualified plans under Revenue Ruling 2008-40 as a result of the uncertainty.
The letter to the IRS from employer representatives asks the IRS to consider and provide guidance that expressly permits U.S. qualified retirement plans to pool assets with Puerto Rico-qualified retirement plans in a group trust or master trust arrangement or, in the absence of such guidance, announce that group trusts and master trusts can continue to pool U.S. and Puerto Rico plan assets for a transition period. The letter also asks the IRS to delay the December 31, 2010 deadline for spinning of plan assets from dual-qualified plans to Puerto Rico-only qualified plans so that plan sponsors can study the impact of the IRS’s decision with respect to group trusts and master trusts.
Our understanding is that the IRS is seriously considering this matter and may issue guidance shortly. McDermott, Will & Emery LLP is closely following this issue. Look for updates in the Employee Benefits Blog if guidance is released.
More information on transfers from dual-qualified plans to Puerto Rico-only qualified plans under Revenue Ruling 2008-40 can be found here.