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Employee Benefits in Puerto Rico – Final Rules on Qualified Retirement Plans, Procedure for Obtaining Hacienda Determination Letters, and More

Employee Benefits in Puerto Rico – Final Rules on Qualified Retirement Plans, Procedure for Obtaining Hacienda Determination Letters, and More
Product Code - TMA58
Speaker(s): Carlos Gonzalez, President, LLC, San Juan, P.R., Eugene M. Holmes, Senior Counsel, Proskauer Rose LLP, Washington, DC, Rolando Cuervo, IRS Employee Plans Revenue Agent, Plantation, FL and Olympia Diaz, IRS Group Manager
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The Puerto Rico Internal Revenue Code of 2011 (the “PRIRC”) made several changes to the local rules on the establishment, qualification and operation of retirement plans in Puerto Rico, including modifying some of the nondiscrimination testing requirements, imposing new limits on benefits and contributions, increasing the limits on elective deferrals to 401(k) plans, and expanding the income taxation of retirement benefits. On December 10, 2011, the PRIRC was amended to, among other things, address several of the questions and concerns U.S. and international companies operating on the Island and their employee benefits advisors had raised about the new retirement plan rules. In its final form, the PRIRC should greatly facilitate and reduce the cost of operating retirement plans in Puerto Rico, as many of the differences between the local and U.S. plan qualification rules have been eliminated.

Also, on December 16, 2011, the Puerto Rico Department of the Treasury (commonly known as “Hacienda”), issued Circular Letter No. 11-10, which establishes new procedures plan sponsors and their service providers will need to follow for obtaining determination letters on the local qualification of retirement plans. Pursuant to Circular Letter No. 11-10, all retirement plans that on or after 2011 have covered participants who are residents of Puerto Rico will have to be (1) amended during 2012 to incorporate the final qualification requirements of the PRIRC, and (2) filed with Hacienda by the first half of 2013 to request a new or updated determination letter. Plans that fail to obtain a determination letter may be subject to adverse Puerto Rico tax consequences.

Carlos Gonzalez was the Puerto Rico benefits and compensation practitioner that assisted Hacienda with the evaluation and drafting of the retirement plan provisions of the PRIRC and Circular Letter No. 11-10. He will be discussing both of them in full detail and addressing action items and alternatives companies should consider for properly and efficiently administering the retirement benefits of their Puerto Rico employees. Eugene Holmes and Mr. Gonzalez will also be discussing the Puerto Rico and U.S. income taxation of retirement benefits of Puerto Rico residents, and will identify common Puerto Rico and U.S. tax compliance failures and alternatives for correcting them.

Finally, the presentation will address the joint initiative the IRS and Hacienda have had in place since 2006 for auditing qualified retirement plans with Puerto Rico participants. Rolando Cuervo, an IRS revenue agent actively involved with such audits, will provide an overview of this joint initiative, including the profile of the plans been selected for audit, the qualification failures being detected, and the alternatives for avoiding and correcting such failures.

The presentation and will allow ample time for questions and answers by registrants.


I. Final Puerto Rico Rules on Qualified Retirement Plans

  • Background
    • Objectives and effective dates of final rules
    • Plans and employers subject to them
    • Technical and practical reasons for the December 2011 technical amendments to the PRIRC
  • Changes to general plan qualification requirements 
    • Nondiscrimination testing and the new “HCE” definition
    • New limits on annual benefits, contributions and compensation
    • Impact of final PRIRC rules on the operation of dual-qualified plans and the need for completing Rev. Rul. 2008-40 transfers to P.R.-only qualified plans
  • New rules specific to 401(k) plans
    • Changes to ADP Test and incorporation of a local excise tax on late correction of failed test
    • Increased limits on elective deferrals and catch-up contributions, both for P.R.-only qualified plans and dual-qualified plans
  • Puerto Rico and U.S. income taxation of the retirement benefits of Puerto Rico employees
    • Expanded income tax withholding requirements on distributions other than lump sums
    • Special tax rules on lump sum distributions
    • Requirements for tax-free rollovers
    • Annual $11,000/$15,000 income exclusion on annuities and installments
    • Local informative returns to report distributions to Hacienda
    • Interplay of U.S. and P.R. rules
    • Alternatives for avoiding and correcting potential liability for under-withholding and under-reporting
  • Additional changes being considered via the PRIRC regulations
  • Action items and time frame for complying with final rules
II. Obtaining Hacienda Determination Letters on Plan Qualification
  • Background
    • Problems with pre-2011 Rules
    • Circular Letter No. 11-10
    • Validity of pre-2011 determination letters
  • Requirement to amend plans to incorporate the final PRIRC plan qualification provisions
    • Due date for adopting amendments
    • Scope of required amendments
  • Requirement to file amended plans with Hacienda
    • Due date for completing filings
    • Process to be followed, required documents and information, and associated fees and expenses
  • Need for completing subsequent filings with Hacienda
    • Plan amendments and events that require obtaining a new determination letter
    • Impact of failing to obtain Hacienda determination letters
III. IRS & Hacienda Plan Audits
  • Background
    • IRS 2003 Puerto Rico plans initiative
    • IRS participation in the supervision of retirement plans in Puerto Rico
    • IRS offices and personnel involved
  • Plan audits; 2006 to present
    • General profile of plans being selected for audit
    • Common plan qualification failures being detected
    • Ongoing IRS/Hacienda efforts

Educational Objectives 

This 90-minutes webinar should prove useful for H.R., benefits and compensation, and tax officials of United States and international companies with operations in Puerto Rico, recordkeepers and third party administrators of plans covering Puerto Rico participants, and benefits and compensation practitioners servicing those companies and their service providers. 

Upon completion of this webinar, participants will be able to:

  • Understand the changes to the local tax rules on qualified retirement plans in Puerto Rico, assess the impact such changes may have on the operation of retirement plans covering Puerto Rico participants, determine the various alternatives for complying with the new rules, and get an overview of additional changes that are likely to result from the regulations.
  • Understand the basic rules and interplay of U.S. and Puerto Rico taxation of retirement income and the potential tax risk that may arise when the rules are not properly followed.
  • Keep abreast of the efforts by the IRS and Hacienda on the supervision of retirement plans on the Island.

Carlos Gonzalez, President, LLC, San Juan, P.R., Eugene M. Holmes, Senior Counsel, Proskauer Rose LLP, Washington, DC, Rolando Cuervo, IRS Employee Plans Revenue Agent, Plantation, FL and Olympia Diaz, IRS Group Manager

Carlos Gonzalez is the President of LLC, a law firm devoted to assisting U.S. and international companies with their employee benefits and executive compensation matters in Puerto Rico. Carlos has over twenty years’ experience as a tax, benefits and compensation professional, both in the United States and Puerto Rico. He assists businesses with all aspects regarding the establishment, operation and termination of employee benefits and executive compensation programs in Puerto Rico, including the qualification of retirement plans with the Puerto Rico Department of the Treasury, the implementation of cost control and risk management strategies, and the handling of employee benefits claims, ERISA lawsuits and government audits and investigations. Carlos is the author of the leading publication on retirement plans in Puerto Rico; 324 Tax Management, International Pension Planning – Puerto Rico, and is a professor on benefits and compensation at the University of Puerto Rico Law School. He has served as an advisor to the Puerto Rico Department of the Treasury and the IRS on Puerto Rico qualified plan matters. Carlos has a BBA with a major in accounting and a J.D. from the University of Puerto Rico, and an LLC in Taxation with an Employee Benefits Certificate from the Georgetown University Law Center. He is a member of the Georgia, Puerto Rico and Washington DC bars and the Puerto Rico Society of Certified Public Accountants.

Eugene M. Holmes is a Senior Counsel in the Employee Benefits, Executive Compensation & ERISA Litigation Practice Center, resident in the Washington, D.C. office. Eugene’s practice focuses on a broad range of employee benefit issues, including counseling clients on all aspects of pension and health and welfare plan administration, mergers and acquisitions, reduction in force initiatives and government audits. He has extensive experience in issues relating to tax qualification of defined contribution and defined benefit retirement plans, employee benefit plan design and structure and participant communications. Eugene works with a variety of national and international public and private companies. He has assisted clients with extensive employee benefit plan compliance reviews, plan design, compliance and termination issues related to corporate transactions and employee benefit plan restructuring and consolidation issues resulting from employer workforce change. In addition, Eugene has written a number of articles and frequently lectures on various employee benefit issues.

Rolando Cuervo worked in the private sector as a controller and accounting department manager prior to joining the IRS in 1986. He started as a Revenue Agent in the Examination Division and transferred to Employee Plans as an EP Revenue Agent in 1991 and currently is a Grade 13 Revenue Agent in EP Examination. A member of the TE/GE EP Gulf Coast Area Speaker’s Cadre since its inception, Rolando has been a writer and instructor for the Employee Plans Division nationwide as part of their CPE training in 2002, 2003, 2005 and 2007 and has represented TE/GE as a presenter at the IRS Nationwide Tax Forums the last 5 years. Rolando graduated with a Bachelor in Business Administration (BBA), Major in Accounting, from Florida International University in 1978.
Olympia Diaz, IRS Group Manager