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.
The Puerto Rico Treasury Department (“PR Treasury”) recently issued guidance on procedures for obtaining new favorable determination letters with respect to retirement plans intended to be qualified under the Puerto Rico Internal Revenue Code of 2011 (the 2011 PR Code). The new guidance, which is effective January 1, 2012, is included in PR Treasury Circular Letter 11-10 (pdf) (the “Circular Letter”).
The Circular Letter provides detailed rules on various procedures related to the implementation of the new qualification requirements for retirement plans under the 2011 PR Code. Most important are the following deadlines:
- Adoption of 2011 PR Code-required amendments. Plan amendments must be adopted on or before the last day of the plan year beginning on or after January 1, 2012. For calendar year plans, this means December 31, 2012.
- Submission of required amendments to PR Treasury for determination letters. Required amendments must be filed with the PR Treasury on or before the last day on which the employer that maintains the plan is to file its Puerto Rico income tax return (including extensions) for the first employer tax year that begins on or after January 1, 2012. For calendar year employers, that will mean April 15, 2013 (or July 15, 2013, in case of extensions).
The Circular Letter also provides guidance as to the specific required amendments that will need to be included for compliance with the 2011 PR Code and the subsequent required filings regarding qualified plan amendments and restatements. Additional important considerations set forth in the Circular Letter include:
- Amendment is mandatory for tax-qualification. Retirement plans intended to be tax-qualified under the 2011 PR Code must be amended to include the new tax-qualification requirements. The amendment requirement applies to all retirement plans that want to maintain tax-qualified status in Puerto Rico, which provided benefits to Puerto Rico residents beginning on January 1, 2011. Additionally, in order to maintain its tax-qualified status in Puerto Rico, all retirement plans with participants in Puerto Rico must be amended to adopt the new qualification requirements.
- Required tax-qualification amendments include: (i) new employer and highly-compensated employee definitions, where applicable; (ii) new limits on annual benefits, contributions, and compensation; (iii) new controlled-group rules; and (iv) tax-free rollover rules. Other additional amendments may be required in certain specific types of plans, as further described in the Circular Letter.
- Procedure for adopting 2011 PR Code tax-qualification amendments. The Circular Letter describes various available methods for adopting amendments, including plan amendment, plan restatement or plan addendum (in the case of dual-qualified plans).
- PR Treasury determination letter is required for qualified status. Retirement plans must be submitted for an updated favorable determination letter by the PR Treasury as to their qualified status under the 2011 PR Code with respect to the new tax-qualification requirements. Retirement plans which were amended to adopt the new requirements under the 2011 PR Code and submitted to the PR Treasury to request a qualification letter before the effective date of the Circular Letter are subject to the rules and procedures of the PR Treasury in effect at the time of the initial request.
- Content requirements for petitions seeking favorable determination letters. The Circular Letter sets forth in detail the information and supporting documentation that is required for petitions seeking favorable letters regarding a retirement plan’s compliance with the 2011 PR Code. Guidance is provided both in the case of individually designed plans and master/prototype adopting plans.
- Remedial action for retirement plans that do not have favorable determination letters under the prior (1994) Puerto Rico Internal Revenue Code. The Circular Letter provides for remedial action for employers that are delinquent in filing for favorable determinations as to a retirement plan’s qualified status under the prior (1994) Puerto Rico Internal Revenue Code.
- Consequence of failure to amend/file with PR Treasury. If a retirement plan does not file a petition for a favorable determination letter along with the information required in the Circular Letter, the plan will be deemed a non-qualified retirement plan under the 2011 PR Code.
- New guidance on future filings for favorable determination letters. Following the adoption of the 2011 PR Code new tax-qualification amendments, retirement plans will need to be submitted for updated rulings as to their qualified status under the 2011 PR Code in cases of (i) plan restatements or (ii) future adoption of plan qualification amendments. The Circular Letter further describes what are deemed “tax-qualification amendments” and provides the deadlines for these future filings.
As this concise overview highlights, Puerto Rico’s new tax-qualification amendments and determination letter requirements present employers who maintain retirement plans in Puerto Rico with detailed substantive and procedural considerations. As 2011 draws to a close and 2012 gets underway, employers and providers with retirement plans in Puerto Rico should consider the implications of the guidance set forth in the Circular Letter for their retirement plans and should begin to take steps to amend them accordingly.