The annual deadline to file plan qualification amendments with the Puerto Rico Treasury (the "Hacienda") for most qualified retirement plans that cover Puerto Rico residents is fast approaching: for plan sponsors filing taxes on a calendar year basis that adopted any such amendments during 2014, the filing deadline is generally April 15, 2015. Unlike the U.S. rules that generally only require qualified retirement plans to file updated plans with the IRS every five or six years, the Puerto Rico rules mandate that such filings be made every year in which certain amendments, called "qualification amendments," (as described below) are made, and the penalties for failing to make such filing are steep, as the plan would be considered a nonqualified plan. Accordingly, any plan sponsor whose qualified retirement plan covers Puerto Rico residents should determine whether any amendments adopted in 2014 require the plan to file updated plan documents this year.

Background

In January 2011, Puerto Rico enacted the Internal Revenue Code for a New Puerto Rico (the "2011 Code"), which required extensive changes to all qualified retirement plans covering employees working in Puerto Rico (even those plans that are also qualified in the United States). Plan sponsors of such plans were required to adopt extensive plan amendments to comply with the 2011 Code by the date, including any extension, on which the employer's Puerto Rico income tax return for the 2013 taxable year had to be filed (which was generally April 15, 2014, for plan sponsors filing taxes on a calendar year basis). Plan sponsors were also required to submit such plans to the Hacienda for review at the same time.

Now that the deadline to adopt that first wave of extensive changes has passed, plan sponsors should be aware of one aspect of the 2011 Code requirements that may have been previously overlooked: the requirement that going forward, qualified retirement plans must file updated plans with the Hacienda every year in which "qualification amendments," (as described below) are made.

Question

How does a plan sponsor ensure ongoing compliance with the 2011 Code for a Puerto Rico-only or a dual-qualified plan?

Answer

If your plan has a Hacienda qualification letter that covers the amendments necessitated by the new qualification requirements of the 2011 Code, that qualification letter remains effective until (i) the plan is restated or (ii) the plan is amended to modify provisions that may have a significant impact on compliance with the qualification rules of the 2011 Code (known as "qualification amendments").

For example, if a plan obtains a Hacienda qualification letter and no plan restatement or qualification amendments are adopted for the next ten years, the existing qualification letter remains in force during those ten years. On the other hand, if any qualification amendments were adopted with respect to the plan subsequent to the issuance of the Hacienda qualification letter, the plan would be required to apply to the Hacienda for an updated qualification letter. This requirement could require frequent applications to the Hacienda for an updated qualification letter, given how broadly the 2011 Code defines the term "qualification amendment". Under the 2011 Code, a "qualification amendment" is any amendment that:

  1. restates the plan document;
  2. incorporates future changes to the plan qualification requirements of the 2011 Code or regulations promulgated thereunder;
  3. changes the plan's rules on the application or correction of the 2011 Code non-discrimination tests;
  4. changes the eligibility rules, benefit formula, service counting rules or distribution options applicable to Puerto Rico participants;
  5. adds or removes participating employers that employ Puerto Rico participants;
  6. terminates contributions to, or authorizes a merger, freeze or termination of, the plan;
  7. substitutes the plan administrator, plan trustee or the paying agent for distributions to Puerto Rico participants; or 
  8. changes the provider of a prototype or master plan.

Question

What happens if a plan sponsor does not apply for, and receive, an updated Hacienda qualification letter after adopting "qualification amendments"?

Answer

A plan that is not filed with Hacienda as required by the 2011 Code is considered a nonqualified retirement plan in Puerto Rico, and the trust related to such a plan will not be exempt from the payment of Puerto Rico income taxes. If a plan loses its tax-qualified status, all contributions made to the plan for Puerto Rico participants would be considered currently taxable income, among other adverse consequences.

If you maintain a qualified retirement plan with Puerto Rico participants, we recommend that the plan be reviewed annually to determine if any amendments adopted during the plan year could constitute a "qualification amendment" under the 2011 Code that would require such plan to be submitted to Hacienda with an application for an updated qualification letter.