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Guest Article

Deloitte logo

(From the December 30, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

More Transition Relief for Puerto Rican Plans


Responding to calls for clarification regarding the ability of Puerto Rican plans under ERISA § 1022(i)(1) to participate in group trusts, the IRS announced it will be issuing guidance. In the meantime, the IRS granted transitional relief. It will not treat group trusts as failing to meet the requirements of Revenue Ruling 81-100 (as modified) merely because they include the assets of an ERISA § 1022(i)(1) plan - as long as the plan was participating in the group trust as of January 10, 2011, or the plan holds assets that were transferred from a qualified plan under the transition relief of Revenue Ruling 2008-40. Moreover, the transition relief of Revenue Ruling 2008-40 is extended for another year, to allow transfers from a qualified plan to an ERISA § 1022(i)(1) plan through December 31, 2011.

Reversal of Position on Puerto Rican Plans

ERISA § 1022(i)(1) provides that, for purposes of Code § 501(a), any trust forming part of a pension, profit-sharing, or stock bonus plan in which all the participants are residents of Puerto Rico is treated as an organization described in § 401(a) and, therefore, generally exempt from income tax if the trust is part of the plan and is exempt from income tax under the laws of Puerto Rico. However, as explained in Revenue Ruling 2008-40, ERISA ยง 1022(i)(1) does operate to extend qualified status under Code § 401(a) to the plan. Therefore, the transfer of assets from a qualified plan to an ERISA § 1022(i)(1) plan constitutes a distribution under the ruling, and causes disqualification of the qualified plan because the distribution is in violation of the qualification requirements. Moreover, the ruling clarified that the portion of the transferred assets consisting of pre-transfer investment earnings would be considered income from sources within the U.S. and would be taxable as such to the participants.

The positions taken in Revenue Ruling 2008-40 reversed earlier positions that had been taken by the IRS regarding transfers from qualified plans to ERISA § 1022(i)(1) plans and the tax treatment of the transferred assets. As a result, in order to provide taxpayers with a period of adjustment, the ruling provided transition relief by which transfers that occurred before January 1, 2011 would not be subject to the new holdings of the ruling.

As a result, those employers who sought to transfer assets from qualified plans to ERISA § 1022(i)(1) plans (e.g., to avoid subjecting Puerto Rican participants to U.S. income tax on their distribution) were motivated to make the transfer by December 31, 2010. ERISA § 1022(i)(1) plans commonly participate in the employer's U.S. master trust - i.e., a group trust under Revenue Ruling 81-100, which allows for the assets of qualified plans under Code § 401(a) to be pooled under a group trust which is exempt from taxation under Code § 501(a) if specific requirements regarding the arrangement are met. However, in recent informal guidance, the IRS indicated that ERISA § 1022(i)(1) plans are not eligible to participate in a group trust under Revenue Ruling 81-100. Practitioners asked the IRS to clarify its position, issue guidance and, if needed, provide transition relief for the new position.

Promised Guidance and Transition Relief

In Revenue Ruling 2011-1 the IRS responded, stating that it anticipates issuing guidance on whether an ERISA § 1022(i)(1) plan may participate in a group trust under Revenue Ruling 81-100. It also provided transition relief. Until guidance is issued, the IRS will not treat group trusts as failing to meet the requirements of Revenue Ruling 81-100 merely because they include the assets of an ERISA § 1022(i)(1) plan - as long as the plan was participating in the group trust as of January 10, 2011, or the plan holds assets that were transferred from a qualified plan under the transition relief of Revenue Ruling 2008-40. Further, the IRS modified Revenue Ruling 2008-40 to extend its transition relief for transfers from a qualified plan to an ERISA § 1022(i)(1) plan for another year. Now, under the extended relief, a transfer made before January 1, 2012 - instead of January 1, 2011 - will not be treated as a distribution from a qualified plan (and as a result will not cause the transferor plan to fail to satisfy the qualification requirements), and the transferred amounts will be treated as income from sources within Puerto Rico.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.


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