On December 8, 2016, the Puerto Rico Department of the Treasury issued its Tax Policy Circular Letter No. 16-07 (“CL 16-07”), announcing the applicable limits for 2017 for qualified retirement plans. Pursuant to Section 1081.01(h) of the Puerto Rico Internal Revenue Code of 2011, as amended (the “PR Code”), the Secretary of the Treasury is required, before the beginning of each taxable year, to provide notice of the applicable limits under the U.S. Code, which are incorporated by reference into the PR Code limits (e.g., annual compensation, highly compensated, annual benefit/contribution limits).
On October 27, 2016, the Internal Revenue Service published the applicable limits under the U.S. Code for taxable year 2017. Consequently, the PR Treasury announced, through CL 16-07, the applicable limits under the PR Code, including those limits applicable under the U.S. Code.
The following are the applicable 2017 limits:
- Annual Benefit Limit applicable to defined benefit plans – $215,000 (increased from $210,000 for 2016)
- Annual Contribution Limit applicable to defined contribution plans - $54,000 (increased from $53,000 for 2016)
- Annual Compensation Limit - $270,000 (increased from $265,000 for 2016)
- Compensation Limit for a highly compensated employee (HCE) - $120,000 (remained unchanged)
- Elective Deferrals Limit applicable only to participants in a dual qualified plan or federal government employees - $18,000 (remained unchanged)
- Catch-up Contributions Limit applicable only to federal government employees age 50 or over - $6,000 (remained unchanged)
- Elective Deferrals Limit applicable only to participants in Puerto Rico-only qualified plans - $15,000 (remained unchanged)
- Catch-up Contributions Limit applicable to participants in a plan not sponsored by the federal government who have reached 50 years of age - $1,500 (remained unchanged)
- After-Tax Contribution Limit – 10% of the aggregate compensation of the employees for all years in which they are participants in a retirement plan (remained unchanged)
In addition to announcing the 2017 limits on PR qualified retirement plans, CL 16-07 also reminds plan sponsors for Puerto Rico that, as previously provided in Tax Policy Circular Letter No. 15-16 of December 28, 2015, that distributions of benefits to Puerto Rico resident participants (or participants that were Puerto Rico residents when the benefits were accumulated or when the contributions were made to the plan) are subject to the tax, withholding, and reporting rules under the PR Code for qualified plans. Thus, such distributions must be reported on Treasury form 480.7C “Informative Return – Retirement Plans and Annuities.” Depending on the type of distribution, it may also be subject to the Puerto Rico tax withholding. The withholding and reporting rules under the PR Code are also applicable to plans established in and operated from the United States, and qualified under the U.S. Code. Failure to comply with these requirements may result in the imposition of various penalties to the plan sponsor and the individual who completes the distribution.
Plan sponsors, including sponsors of plans established and operated in the United States and qualified under the U.S. Code with Puerto Rico resident participants (and with participants who were residents of Puerto Rico while the benefits were accumulated or the contributions were made to the plan), must ensure the full compliance of the withholding and reporting rules provided under the PR Code.