Recent changes to Puerto Rico's tax treatment of certain retirement plans have taken effect. Act No. 106 of August 23, 2017 ("Act 106") amended Section 1081.01 of the Puerto Rico Internal Revenue Code as amended, (the "PR Code"), to reflect changes in the rules governing Puerto Rico qualified retirement plans. Employee benefit practitioners, service providers, as well as the Pension Plan Section at the Puerto Rico Department of the Treasury (the "PR Treasury") were taken by surprise by these amendments, as they revised legislation designed to guarantee payment to government retirees and to establish a new defined contribution plan for government employees. Act 106 amended the PR Code (i) to eliminate the annual limits imposed by Act 9 of February 8, 2017 ("Act 9") to defined contributions plans and to reinstate the previous annual limitations based on Section 415(c) of the United States Internal Revenue Code of 1986, as amended (the "U.S. Code"); (ii) to provide new rules for dual qualified plans pertaining to coverage testing; and (iii) to modify significantly the tax treatment of lump sum distributions. The following is a summary of the most important changes:
Changes Made by Act 106
1 Limitation on Annual Plan Contributions Applicable to Defined Contribution Plan
Act 106 eliminated the incomprehensible annual contribution limits imposed by Act 9, reinstating the annual limit based on U.S. Code Section 415(c). As a result of this change, the applicable annual limit on plan contributions for a defined contribution plan will continue to be the lesser of the applicable limit under U.S. Code Section 415(c) ($54,000 for year 2017 and $55,000 for year 2018) or 100% of the participant's compensation paid by an employer during a calendar year or a plan year, as selected by the employer.
2 Tax Treatment of Total Distributions ("Lump-Sum Distributions")
Changes to the tax treatment of lump-sum distributions are in effect for distributions made after December 31, 2017. The PR Code defines a lump-sum distribution as a distribution of the total benefits under a plan to a participant or a beneficiary within one taxable year due to the participant's separation from service for any reason or due to plan termination.
Lump-sum distributions made before January 1, 2018 - Remain the same. In general, lump-sum distributions will generally be considered a long-term capital gain subject to a 20% tax rate (10%, if certain requirements are met related to...