As previously reported, Act 77 of July 1, 2014 (“Act 77”) provided a period during which participants in retirement plans could prepay, at a reduced tax rate, the amounts accumulated under such plans.  The original window period covered from July 1, 2014 through October 31, 2014.  On December 22, 2014, however, Puerto Rico Governor signed into law SB 1189 (now, Act 238 of December 22, 2014) which, among other provisions, extends the aforementioned period until January 31, 2015.  

In addition to extending the window period, Act 238 clarifies certain ambiguities in Act 77, which were previously clarified administratively through guidance issued by the Puerto Rico Department of the Treasury (“PR Treasury”) (See our previous posts from August and October 2014, discussing the PR Treasury’s guidance).  Some of those clarifications are summarized as follows:

  • The tax rate during the window period for qualified plans under the PR Code is 8%
  • The tax rate during the window period for non-qualified deferred compensation plans is 15%
  • The 8% reduced tax rate is also applicable to any amounts paid or distributed to a participant or beneficiary under a plan qualified under the PR Code as a result of a separation from service or plan termination during the window period
  • Plans may be amended to allow in-service distributions to be used for the tax prepayment during the window period

In addition to the above, Act 278 requires those plans that are amended to allow in-service distributions to be used to make the prepayment, to include in the amendment   a provision stating that the paying agent will issue the payment (via certified check, cashier’s check or money order) payable to the Secretary of the PR Treasury. If the participant or beneficiary uses the amount distributed for other purposes, including the payment of other tax owed to the Secretary of the PR Treasury, the amount distributed to pay the special reduced tax will be taxed pursuant to the regular tax rates in effect at the time of the distribution.