Puerto Rico Treasury Department Extends Tax Exemptions for COVID-19 Employer-Provided Payments and Amends Rules for Qualified Retirement Plan and IRA Distributions

Pursuant to the State of Emergency declared by Puerto Rico Governor Hon. Wanda Vázquez-Garced on March 12, 2020 in connection with the COVID-19 pandemic, and the Executive Order 2020-023 she issued shortly thereafter, most businesses in Puerto Rico have been closed since 6:00 p.m. on March 14, 2020, and unless the restrictions are again extended, will remain closed until April 12, 2020.  In light of the economic impact on both the businesses that have been forced to close and their employees, and as part of Governor Vázquez Garced’s requested measures to deal with this impact, on March 29, 2020, the Puerto Rico Treasury Department (“PR Treasury”) issued Internal Revenue Circular Letters (CC RI) Numbers 20-22 and 20-23.

CC RI 20-22

CC RI 20-22 extends the provisions of Circular Letter 20-08 (CC RI 20-08) to qualifying payments voluntarily provided by employers as a result of the COVID-19 emergency. CC RI 20-08 granted employers temporary income tax exemptions over payments and certain benefits made to their employees and/or independent contractors to assist with earthquake relief efforts. Therefore, payments made to employees and independent contractors will be considered “Qualified Payments Made for Disaster Assistance” (“Qualified Payments”) and, accordingly, be tax exempt, provided they meet all the requirements established in CC RI 20-08, including the eligibility period and the payment limits ($2,000 per month and $4,000 for the entire eligibility period). The PR Treasury determined that as applied to the COVID-19 emergency, “Qualified Payment” will also include: (1) payments made to employees and independent contractors as a result of the state of emergency declared in Puerto Rico due to the COVID-19; and (2) voluntary payments made by a private-sector employer to aid its non-exempt employees who have not been able to work during the COVID-19 lockdown.

Notably, the eligibility period as per CC RI 20-08 runs from February 1, 2020 through April 30, 2020. Accordingly, and although the COVID-19 emergency may very well extend beyond April 30, 2020, at this point only payments made within the eligibility period will be tax-exempt.

The PR Treasury further extended the provisions of CC RI 20-08 related to interest-free loans to employees or independent contractors to cover any COVID-19-related expenses. The loans will not be considered taxable income provided they comply with the rules previously established in CC RI 20-08, to wit: (i) they are provided during the Eligible Period; (ii) the amount of the loan does not exceed $20,000 per worker; and (3) the loan repayment term does not exceed 24 months.

CC RI 20-23

CC RI 20-23 amends Internal Revenue Circular Letter 20-09 (CC RI 20-09), which provided special rules and procedures applicable to distributions from qualified retirement plans and individual retirement accounts (IRAs) following the recent earthquakes in Puerto Rico, to incorporate, as part of the definition of “Eligible Expenses,” those related to the COVID-19 emergency. 

In essence, CC RI 20-23 maintains all CC RI 20-09 rules for eligible distributions, eligible individuals, Puerto Rico income tax treatment, responsibilities of the withholding agent, and relaxing of the restrictions on post-distribution contributions to the plans. CC RI 20-23 amends, however, the “Eligible Expenses” section to include any expense incurred by “Eligible Individuals” (the participant, their spouse, descendants or ascendants) to compensate losses or damages suffered, and to cover basic needs as a result of the COVID-19 emergency, including loss of earnings as a result of the order to close and the curfew declared by the Governor.

Importantly, CC RI 20-23 makes clear that for purposes of the distribution limits provided in Sections 1081.01 (b) (1) (D) and 1081.02 (d) (1) (I) of the PR Code, the January 2020 earthquakes and the COVID-19 emergency are considered a single event. Accordingly, the special disaster distributions made during the Eligible Period (from February 20 to June 30) are subject to the limits established in CC RI 20-09 regardless of whether they are to cover Eligible Expenses due to the earthquakes, the COVID-19 emergency, or both.

As a result of CC RI 20-23, employers in Puerto Rico should consider whether to amend their plans to incorporate these special rules in order to provide assistance to their employees.  Employers that choose to incorporate these changes, however, should consult with counsel to ensure compliance.

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.