On July 1, 2014, Puerto Rico adopted new legislation (Tax Act 77), which provides a window from July 1, 2014 – October 31, 2014, for participants in Puerto Rico retirement plans to prepay at reduced rates Puerto Rico income tax on the value of accrued benefits. On August 6, the Puerto Rico Treasury Department issued guidance on the prepayment option via Administrative Determination No. 14-16. The guidance clarified how participants in Puerto Rico-qualified retirement plans may prepay to the Puerto Rico Treasury Department by October 31, 2014, income tax at the rate of eight percent on all or a portion of the participants’ vested balance or accrued benefit. Retirement plan sponsors with Puerto Rico employees, both dual-qualified and Puerto Rico-only plans, should make sure their administrators are aware of and can comply with the tax prepayment rules in the event a participant submits a request.
The income tax prepayment may be made by an individual participant or by the plan trustee on behalf of a participant. If a participant is making the tax prepayment, he or she must complete and file three copies of Form SC 2911 with the Puerto Rico Treasury Department, along with a recent copy of a plan statement (no older than 30 days) reflecting the vested account balance or accrued benefit. Plan sponsors and administrators should expect that they may be asked by plan participants for updated account statements or accrued benefit estimates in order to satisfy this requirement.
Plan participants may make the tax prepayment from their own funds or from plan assets, if they are eligible to take a distribution. Plan administrators may need to provide assistance in completing Form SC 2911 because it requires information about the plan that participants normally would not have access to, such as when the plan filed for a determination letter with the Puerto Rico Treasury Department and when the plan received a favorable determination. After the Treasury Department stamps and returns two original copies of the prepayment form to the participant, the participant must provide the plan administrator with one of two originals within 30 days, as evidence of the tax prepayment.
Plan sponsors who maintain retirement plans qualified in Puerto Rico should consider how they may wish to communicate this option to participants, keeping in mind that time is short, as the window ends on October 31, 2014. Plan sponsors should also make sure that administrators are able to separately track the accounts of participants who have prepaid the tax so that, upon a subsequent distribution, only amounts for which the tax was prepaid are subject to Puerto Rico income tax and withholding. Note that a similar prepayment window occurred in 2006, so plan administrators may have systems already set up to track for similar accounts or benefits that had income tax prepaid.