With the fourth quarter of 2020 upon us, it is time to evaluate the year-end amendments that may be needed for retirement plans that are tax-qualified in Puerto Rico.
Unlike the Internal Revenue Service, which each year issues a list of required amendments to U.S.–qualified plans and their respective adoption due dates, the Puerto Rico Department of the Treasury (commonly known by its Spanish name, Departamento de Hacienda de Puerto Rico, or Hacienda) seldom requires mandatory amendments to Puerto Rico–qualified plans. The year 2020, however, has been an exception to the general rule.
Specifically, if during 2020, a Puerto Rico–qualified plan allowed participants to receive in-service hardship withdrawals on account of either the COVID-19 pandemic or the earthquakes that affected the island at the beginning of the year (collectively, “disaster-relief distributions” or “DRDs”), the official plan document must be amended accordingly by December 31, 2020.
Employers had full discretion to decide whether to offer DRDs under their Puerto Rico retirement plans and to impose reasonable restrictions on, among other things, the amounts, eligibility requirements, and application processes for DRDs. Employers that offered DRDs now need to amend their plans.
DRD-Related Amendments
Items specified in DRD-related amendments typically include:
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participants who were (or were not) eligible for DRDs;
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descriptions of the types of financial losses, unforeseen expenses, and necessities eligible for DRDs;
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limits on the dollar amount or the number of DRDs that a participant could receive during the year;
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the due date for the filing of a completed application for a DRD, which was usually set by the recordkeeper for the plan; and
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the due date for the payment of a DRD to the participant, which can be no later than December 31, 2020
Hacienda Filing
An employer does not need to file DRD-related amendments with Hacienda. However, if during 2020, a plan was subject to a qualification amendment, the employer will need file such qualification amendment with Hacienda. In that case, the employer may want to consider including an executed copy of the DRD-related amendment within the Hacienda filing packet for the qualification amendment. By doing so, the employer will likely end up receiving from Hacienda a favorable determination letter covering both the qualification amendment and the DRD-related amendment (i.e., written confirmation that Hacienda has officially approved both amendments).
Including multiple amendments within the same Hacienda filing packet does not increase the applicable filing fees, nor complicate the administrative review and approval process, nor subject the employer or the plan to any sort of adverse action from Hacienda.
Qualification Amendments
For these purposes, a “qualification amendment” means an amendment that (1) applies to or impacts the Puerto Rico participants in the plan and (2) does any one of the following:
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Incorporates amendments or changes to the plan qualification rules of Section 1081.01 of the Puerto Rico Internal Revenue Code of 2011
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Changes the rules on eligibility or participation
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Changes the formula for benefits accruals (defined-benefit plans) or allocation of employer contributions (defined-contribution plans)
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Changes the method or form for the payment of plan benefits
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Adds or removes participating employers
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Renames the plan
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Freezes, terminates, or liquidates the plan
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Merges or spins off the plan
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Changes the plan administrator or named fiduciary for the plan, the trustee of the trust fund forming part of the plan, or, if applicable, the paying agent processing payments and distributions to Puerto Rico participants
Qualification amendments must be filed with Hacienda by the due date, including extensions, for filing the Puerto Rico income tax return of the plan sponsor or Puerto Rico employer participating in the plan, as applicable, for the tax year that includes the last day of the plan year during which the amendment first became effective. For calendar year plans sponsored or maintained by employers with a calendar tax year, the Hacienda filing due date is usually April 15 (or October 15, if an extension is timely requested) of the year immediately following the year of the amendment.
Again, if an employer made qualification amendments to a plan during 2020, the employer can take advantage of the upcoming Hacienda filing to include a copy of the DRD-related amendment and, thereby, receive a Hacienda favorable determination letter.
Tax Reporting
Finally, the employer may want to confirm with the party responsible for processing benefit payments to the Puerto Rico participants in the plan (usually the trustee) that all DRDs are timely and properly reported both to Hacienda and to the corresponding participant through the electronic filing and delivery of local tax form 480.7C, known as the Informative Return – Retirement Plans and Annuities. The 2020 form 480.7C is due on February 28, 2021.
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