PBGC Withdraws Two Territorial Coverage Opinion Letters Impacting Puerto Rican Plans

Author:Mr Justin S Alex
Profession:Proskauer Rose LLP

The status of PBGC coverage for Puerto Rico defined benefit plans is one that has been the subject of review and analysis by the PBGC for quite some time. Most recently, on April 19, 2013, the PBGC withdrew two older opinion letters (Opinion Letters 77-172 and 85-19), which addressed whether defined benefit plans established and maintained in Puerto Rico are covered by Title IV of ERISA. This withdrawal may be an indication that further guidance for Puerto Rico based defined benefit plans is forthcoming.

By way of background, ERISA provides that a defined benefit plan is generally subject to Title IV if either (1) the Secretary of Treasury determines that the plan is described by Internal Revenue Code section 401(a); or (2) the plan otherwise meets the requirements of Code section 401(a) in practice. One key requirement for a defined benefit plan under Code section 401(a), is that the plan's underlying trust must be "created or organized in the United States." United States territories such as Puerto Rico are not considered part of the United States for section 401(a) purposes. However, Title IV does cover Puerto Rico-based plans with non-United States trusts if the plans make a certain election under ERISA section 1022(i). (ERISA section 1022(i) is implemented by Treasury Regulation 1.401(a)-50.) The section 1022(i)(2) election means that a Puerto Rico based plan has made an irrevocable election to be treated as a qualified...

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