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 plan under Code section 401(a), even with no United States trust.
In Opinion Letter 77-172, the PBGC opined that Title IV coverage of a Puerto Rico-based defined benefit plan was not conditioned on a 1022(i)(2) election. In other words, the PBGC seemed to think that a Puerto Rico based plan could be subject to Title IV even without the election. The PBGC reiterated that point in Opinion Letter 85-19, noting that non-United States trusts alone do not exclude territorial plans from Title IV coverage. It is unclear whether PBGC will soon provide additional guidance on Title IV coverage of territorial plans after withdrawing Opinion Letters 77-172 and 85-19. However, it appears that PBGC may now consider a 1022(i)(2) election as a prerequisite for Title IV coverage of Puerto Rican plans with non-United States trusts. Plan sponsors of Puerto Rico plans should continue to monitor these developments because plans that are not covered by Title IV are not subject to PBGC premiums, liabilities under section 4062(e) of ERISA, or PBGC reporting requirements.