Puerto Rico Participants

[Guest jjuergens]

Does anyone have participants residing in Puerto Rico in their plan? If so, are their distributions handled differently (taxes, etc.)?

[J. Bringhurst]

I'm not sure of the specific PR qualification issues (some of the differences may include deferral/after-tax limits, compensation limits, ADP testing, HCE determination), but you should be aware that, in addition to ensuring that a retirement plan covering employees located in Puerto Rico comply with the requirements necessary for qualification under Puerto Rican law, such retirement plan should be filed with the Puerto Rico Treasury Department. If it is found that the Retirement Plan does not qualify under Puerto Rican law, contributions made by Puerto Rican participants may not be tax deductible to them.

The tax issues may have change since I last looked at this issue, but here is my understanding:

The US tax and mandatory withholding rules apply with respect to PR plans if the plan is also qualified in the US and the trust is located in the US. The amount of the distribution subject to US taxation and withholding is equal to the earnings portion of the distribution.

Distributions from a PR qualified plan are generally subject to PR income taxes and 20% mandatory withholding. This taxation and withholding is in addition to any other withholding which may be imposed under US law.

If a PR participant does a trustee to trustee transfer to an appropriate PR tax-qualified vehicle, there is no PR tax/withholding requirement but the transfer will be subject to US tax/withholding as described above. Conversely, if a PR participant does a trustee to trustee transfer to an appropriate US tax-qualified vehicle, there is no US tax/withholding requirement but the transfer will be subject to PR tax/withholding as described above.

[david rigby]

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