On December 15, 2017, the Puerto Rico Treasury Department issued Circular Letter of Tax Policy 17-02 formally announcing the key pension limits for 2018, as required by the Puerto Rico Internal Revenue Code of 2011.
According to a Groom Law Group Benefits Brief, for plans qualified only in Puerto Rico (PR-only plans), the limits on elective deferrals, catch-up and after-tax contributions, and the highly compensated employee threshold all remain unchanged for 2018, while the limits on annual benefits, annual contributions, and plan compensation all increased for 2018. These limits are different than limits for U.S.-qualified or dual-qualified plans. For example, the 2018 limit on elective deferrals to PR-only plans is $15,000, rather than the $18,500 limit for U.S.-qualified and dual-qualified plans. The limit for catch-up contributions for both PR-only and dual-qualified plans is $1,500.
Juan Luis Alonso, of counsel with Groom Law Group Chartered, in Washington, D.C., whose practice is almost exclusively related to Puerto Rico plans, explains that Puerto Rico has its own Treasury Department, and a separate Internal Revenue Code provides rules and regulations for qualified plans in Puerto Rico. “The Puerto Rico Internal Revenue Code is based on the U.S. Code, but hasn’t kept pace,” he tells PLANADVISER. “A couple of amendments brought the Code closer to the U.S. Code, but there are still some differences.”
Retirement plans that cover Puerto Rican residents must file with the Puerto Rico Treasury Department for qualification. According to Alonso, this includes PR-only plans and dual-qualified plans. Unlike the U.S. Treasury, the Puerto Rico Treasury Department still requires determination letters for new plans and for plans updated by amendments. In June 2016, the U.S. Internal Revenue Service eliminated the five-year remedial amendment cycles for individually designed plans and made other changes to its determination letter program.
Alonso explains that different limits and rules for plans qualified in Puerto Rico do cause some operational issues for plan sponsors. Puerto Rico plans are subject to provisions of Title I of the Employee Retirement Income Security Act (ERISA) in the same way as U.S. qualified plans, but in case of defined benefit (DB) plans, some Puerto Rico plans have received a letter allowing them not to be subject to Title IV of ERISA. “Not only does this mean they do not have to pay premiums to the PBGC [Pension Benefit Guaranty Corporation], but they may also request a refund of any premiums paid in the prior six years,” he says. Another difference that can be an issue for dual-qualified plans is that in Puerto Rico, the average deferral percentage (ADP) test is required, but there is no average contribution percentage (ACP) test requirement.
According to Alonso, as the Puerto Rico Code gets closer to the U.S. Code, it gets easier for dual-qualified plans to comply. Still, some plan sponsors choose to maintain separate plans for U.S. residents and Puerto Rican residents.
As for other U.S. territories, Alonso says the U.S. Virgin Islands have a mirror Code of the U.S. Code, so benefit limitations and ERISA fully apply, but he is not as familiar with the laws in other U.S. territories.Retirement plan sponsors with participants in U.S. territories should familiarize themselves with any differences in law.