Two years after the Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) jointly issued a high-profile Request for Information regarding how defined contribution plans can better provide lifetime income, the IRS and Department of the Treasury have issued some initial guidance. DOL guidance, expected to further underscore the importance of the issue, is anticipated “in the near future.”
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.
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