As a result of the Commonwealth’s recently changed tax code, U.S. employers with retirement plan participants in Puerto Rico must have their plans reviewed this year to incorporate the recent changes and file with the Hacienda next year to obtain an updated determination letter.
Eugene Holmes, Washington, D.C.-based Proskauer benefits lawyer and senior counsel in the law firm’s Employee Benefits, Executive Compensation & ERISA Litigation Practice Center, explained that U.S. employers that provide retirement benefits to employees in Puerto Rico provide them with either dual-qualified retirement plans (both U.S. and Puerto Rico) or Puerto Rico-only plans. In both cases, retirement plan documents must reflect the new tax code, Holmes told PLANSPONSOR.
Also in 2012, the window of opportunity for completing a tax-advantaged transfer of benefits for Puerto Rico participants in a U.S. retirement plan to a separate Puerto Rico retirement plan is scheduled to end. Companies interested in implementing these transfers will need to take action, Holmes said.
“Ordinarily, that transfer would be a taxable event to the employee,” Holmes said, but the Internal Revenue Service (IRS) said it will not implement a tax as long as the employer completes the transfer by the end of 2012.
Many employers have already transferred benefits, Holmes added.
Other employers, however, are waiting to see if the IRS gives the green light for Puerto Rico assets to be invested in a group trust. If the IRS does not approve it, Holmes said there is a possibility many employers will not transfer benefits and will keep them in a dual plan.
“It’s hard to know exactly what employers will do,” he added.
While there is “no clear indication” of when the IRS guidance will be issued, Holmes said he expects it will be soon.