Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On September 17, 2022, Puerto Rico Governor Hon. Pedro Pierluisi issued Executive Order No. OE-2022-045, declaring a state of emergency due to the passing of Hurricane Fiona through the Island. Likewise, on September 21, 2022, President Joseph Biden authorized a disaster declaration for Puerto Rico, opening up additional relief and assistance for Puerto Rico's recovery process after the devastation left by the hurricane.
In light of these actions, on September 27, 2022, the Puerto Rico Treasury Department (“PR Treasury”) issued Administrative Determination No. 22-08 (“AD No. 22-08”), summarizing the fiscal administration measures for the benefit of taxpayers and authorized representatives affected by the emergency that has been generated as a result of Hurricane Fiona. A summary of the administrative measures taken by the Treasury Department follows:
Extension of Deadlines
AD No. 22-08 provides that the Department has extended the deadline to file any income tax return, or requests for extension, of individuals, corporations, conduit entities and other legal entities whose expiration date of filing, according to the Code or publication previously issued by the Secretary, is between September 30 and December 15, 2022, until December 15, 2022. Likewise, this extension will be applicable to any outstanding amount that, according to the provisions of the Code, must be paid by any due date that falls between September 30 and December 15, 2022.
Special Hardship Distributions and Loans from Qualified Retirement Plan and IRAs
The PR Treasury announced through AD 22-08 the availability for Qualified Retirement Plans and individual retirement accounts (IRAs) to issue special hardship distributions. Furthermore, the PR Treasury issued Internal Revenue Circular Letter No. 22-13 (“CC RI 22-13”) to provide special rules and procedures applicable to distributions from qualified retirement plans and IRAs. The following is a summary of the most significant provisions:
- Eligible Distributions – These are payments or distributions from a qualified retirement plan under Section 1081.01 of the Puerto Rico Internal Revenue Code (PR Code) or an IRA that an Eligible Individual has requested to cover Eligible Expenses. Distributions must be made between October 6, 2022 and December 31, 2022 (the Eligible Period).
Eligible Distributions from a qualified plan are hardship distributions, which may be made through total distributions (i.e., lump-sum distributions) or partial distributions. Annuities and installment payments will not be considered Eligible Distributions. Eligible Individuals may choose to receive these special distributions regardless of other forms of payment that they may have available under the retirement plan or IRA. In other words, the Eligible Individual need not exhaust other plan options, such as loans, prior to requesting this type of hardship distribution.
The penalty for early withdrawal imposed by the PR Code will not apply to Eligible Distributions from IRAs. However, the individual may be subject to a penalty for early withdrawal imposed by the financial institution or insurance company under the IRA's terms.
CC RI 22-13 also establishes the limits on distributions that can be taken, as well as the supporting documentation that must be submitted by the participant with the request for an Eligible Distribution.
- Eligible Individual – An Eligible Individual is a bona fide Puerto Rico resident during the entirety of taxable year 2022 who is a participant in the plan. Only Eligible Individuals may request Eligible Distributions.
- Eligible Expenses – CC RI 22-13 defines “eligible expenses” as those an Eligible Individual incurs to compensate for losses or damage suffered as a result of Hurricane Fiona and any related unforeseen and extraordinary expenses needed to cover basic needs. These include, but are not limited to: expenses to repair a residence, business establishment, or motor vehicle; expenses to verify that the property meets the established construction codes; expenses incurred to acquire a new principal residence or business establishment due to their being destroyed by Hurricane Fiona; payment of medical expenses; replacement or repair of furniture; purchase of food and gas; payments for purchase or repair of power generators; and lodging and meal expenses incurred during the recovery period due to total or partial destruction of principal residence incurred as a result of the hurricane.
While the Eligible Individual must provide supporting documentation with the request, the documentation need not include a detailed accounting of the Eligible Expenses.
Pursuant to CC RI 22-13, Eligible Expenses may be incurred by an Eligible Individual, their spouse, descendants or ascendants. As an example, Eligible Individuals may request a distribution to cover part of the cost to repair a parent's or child's residence.
Finally, while an Eligible Distribution must be made during the Eligible Period, the expenses related to such distributions need not be incurred within the Eligible Period. Thus, an Eligible Employee may receive an Eligible Distribution to defray Eligible Expenses incurred after the termination of the Eligible Period.
- Puerto Rico Income Tax Treatment – For purposes of Puerto Rico income tax, Eligible Distributions received by an Eligible Individual during the Eligible Period will be treated as a distribution because of financial hardship and will be subject to the following tax treatment:
The first $10,000 distributed during the Eligible Period will be exempt from income tax and the alternative basic tax and will not be subject to any tax withholding.
Any distribution over $10,000 and up to $100,000 will be subject to a 10% withholding and income tax rate, in lieu of the regular withholding and income tax rate imposed by the PR Code. In order to benefit from this special tax treatment, the income tax withholding must be made at the time of the distribution, or the distribution will be considered taxable income subject to the regular tax treatment for such distributions under the PR Code.
The Eligible Individual may request more than one Eligible Distribution during the Eligible Period, from either qualified retirement plans or IRAs or both, but the total Eligible Distributions cannot exceed $100,000 and the total exempt amount cannot exceed $10,000.
Eligible Distributions will be taken first from the pre-tax contributions and earnings portion of the account. If such funds are not enough to cover the Eligible Distributions, funds will be taken from after-tax contributions or contributions for which the Eligible Employee prepaid taxes.
- Responsibilities of the Withholding Agent – The employer, administrator or service provider of the trust or annuity contract that makes the Eligible Distributions will be considered a withholding agent and thus will be responsible for complying with the withholding rules provided in CC RI 22-13, and for remitting them to the PR Treasury no later than the 15th day of the month following the date of the distribution. Failure to comply with the withholding and remittance rules established in CC RI 22-13 will result in penalties as well as the imposition of the tax not withheld and remitted.
- Restrictions on Post-Distribution Contributions to the Plan – Eligible Individuals who receive Eligible Distributions will not be subject to the 12-month contributions limitation provided under the PR Code Regulations. In other words, Eligible Individuals may request and receive Eligible Distributions, and may continue making contributions to the retirement plan.
- Terms of the Qualified Retirement Plan – The provisions applicable to qualified retirement plans are optional. Therefore, employers maintaining qualified plans may choose to, but are not required to, adopt part or all provisions of CC RI 22-13. Plan sponsors may, for example, choose to amend their retirement plan to allow Eligible Distributions in accordance with CC RI 22-13, but can establish limits to such distributions to a maximum amount less than $100,000, or can require that distributions be related to certain events in particular. Furthermore, the administrator of a dual-qualified retirement plan (both in the U.S. and Puerto Rico), may limit the changes to the distribution rules to Puerto Rico participants, to be consistent with those provisions under the U.S. tax code or with the changes authorized by the Internal Revenue Service for participants in retirement plans affected by the hurricane.
Qualified retirement plans that adopt the provisions of CC RI 22-13 must amend their plans accordingly no later than December 31, 2022. However, the approval and payment of Eligible Distributions may be made prior to the adoption of the amendment. Therefore, distributions can be completed from October 6 until December 31, 2022.
Tax Exemptions for Employer-Provided Payments and Certain Benefits to Employees and Independent Contractors
Through AD 22-08, the PR Treasury granted employers temporary income tax exemptions over payments and certain benefits made to their employees and/or independent contractors for relief due to the recent hurricane. These employer-provided payments must be considered “Qualified Payments Made for Disaster Assistance” and meet certain other requirements to be tax-exempt. These criteria for the favorable tax treatment of these payments are:
- To supply, reimburse or pay necessary and reasonable expenses (such as food, medicine, gasoline, lodging, medical expenses, childcare expenses, dependent care expenses, purchase of power generators, expenses incurred for potable water for the home and funeral expenses) to individuals or their family members incurred as a result of the hurricane.
- To reimburse or pay necessary and reasonable expenses incurred in the repair or rehabilitation of the individual’s principal residence, or replacement or repair of the individual’s movable property in the residence, to the extent the need for the replacement, repair, or rehabilitation is due to damage caused by the hurricane and the payment is made directly to the provider of the service or the goods.
- Payments made directly to the individual for monetary assistance to cover any damages or losses due to the hurricane.
- Payments made by the federal, state or local government or any government agency or instrumentality as a result of damages or losses caused by the hurricane, to promote the general wellbeing (only to the extent the damage or loss has not been compensated by an insurance policy or otherwise).
This exclusion will apply to those payments in cash or its equivalent (i.e., checks, money orders, gift certificates, etc.) made directly by the employer to the employee or independent contractor. Those Qualified Payments for the benefit of the employee or independent contractor that constitute goods or services and that in turn are paid directly by the employer to the supplier of such goods or services, will not be taken into consideration for the limitation of the amount of the Qualified Payments, and therefore will be excluded from the gross income of the employee or independent contractor. This exclusion for Qualified Payments is available from September 19 to December 31, 2022.
In addition to the payments described above, employer-provided interest-free loans to employees or independent contractors to cover reasonable and necessary expenses for themselves or their families, and expenses for the construction or repair of the employee’s or independent contractor’s principal residence incurred as a consequence of the hurricanes, will not be considered taxable income if: (i) they are provided from September 19 through December 31, 2022; and (ii) the amount of the loan does not exceed $20,000 per worker. The employer may provide more than one loan for these purposes, provided the total amount of the loans does not exceed $20,000. The employer may offer this type of loan in addition to Qualified Payments Made for Disaster Assistance.