Puerto Rico 165(e) Plans - Consequences of No PR Determination Letter

[rocknrolls2]

Company X maintains a US qualified 401(k) plan for tens of thousands US employees and less than a handful of Puerto Rico-resident employees. This plan has never been filed in Puerto Rico for a determination letter. What are the tax consequences to Puerto Rico residents under Perto Rico's tax law if the plan is not registered? Are the before-tax contributions treated as after-tax contributions? If the plan is subseuqently registered, do these employees obtain a basis in the after-tax contributions prior to registration and a separate source for pre-tax contributions post-registration? It is my understanding that unless a separate Puerto-Rico based plan is established, Puerto Rico residents will be subject to US tax to the extent they receive earnings on plan distribution. Even though the Puerto Rico law has not been amended to recognize Roth 401(k) contributions, if Puerto Rico residencts make future contributions as all Roth 401(k) contributions and receive qualified distributions, doesn't this effectively put an end run around being subject to US tax on distributions of earnings?

[Guest Lisa Buddenhagen]

Company X maintains a US qualified 401(k) plan for tens of thousands US employees and less than a handful of Puerto Rico-resident employees. This plan has never been filed in Puerto Rico for a determination letter. What are the tax consequences to Puerto Rico residents under Perto Rico's tax law if the plan is not registered? Are the before-tax contributions treated as after-tax contributions? If the plan is subseuqently registered, do these employees obtain a basis in the after-tax contributions prior to registration and a separate source for pre-tax contributions post-registration? It is my understanding that unless a separate Puerto-Rico based plan is established, Puerto Rico residents will be subject to US tax to the extent they receive earnings on plan distribution. Even though the Puerto Rico law has not been amended to recognize Roth 401(k) contributions, if Puerto Rico residencts make future contributions as all Roth 401(k) contributions and receive qualified distributions, doesn't this effectively put an end run around being subject to US tax on distributions of earnings?

I recently worked for a large gaming company and discovered that our PR employees were participating in our US 401k. Our ERISA attorney advised me that these people are not allowed to participate in any US based retirement plan. He said that we would have to remove the PR people from our 401k and and set up a 401k based in Puerto Rico. PR employees are also not eligible to have their medical contributions deducted on a pretax basis. The tax laws are different in PR. You should obtain advice of your ERISA attorney.

[Guest caribbeanbenefits]

Company X maintains a US qualified 401(k) plan for tens of thousands US employees and less than a handful of Puerto Rico-resident employees. This plan has never been filed in Puerto Rico for a determination letter. What are the tax consequences to Puerto Rico residents under Perto Rico's tax law if the plan is not registered? Are the before-tax contributions treated as after-tax contributions? If the plan is subseuqently registered, do these employees obtain a basis in the after-tax contributions prior to registration and a separate source for pre-tax contributions post-registration? It is my understanding that unless a separate Puerto-Rico based plan is established, Puerto Rico residents will be subject to US tax to the extent they receive earnings on plan distribution. Even though the Puerto Rico law has not been amended to recognize Roth 401(k) contributions, if Puerto Rico residencts make future contributions as all Roth 401(k) contributions and receive qualified distributions, doesn't this effectively put an end run around being subject to US tax on distributions of earnings?

Consequences: all employees must file amended tax filings for each year they participated in that plan; the employer would most likely end up with paying for the amended tax filings and with a penalty from Hacienda (PR Treasury); if this goes to litigation, the employer can be removed from being a Fiduciary. All in all, you dont want to know. In order to benefit from tax deferrals under the PR Tax Code, the plan must be locally qualified. There are a bunch of US qualified plans that are also locally qualified. Nevertheless, these plans are a nightmare to administer because they are regulated by two tax laws (one that is not needed...the US Tax Code) and these two laws are not 100% compatible. The IRS was working on a communication on how to handle these plans but as of today I have not seen anything. Best way to go...make a new plan qualified only under PR Tax laws and move all employees into it. Beware of local big law firms...you might be better under a boutique law firm (solo practitioner): speedy service and save a bunch of money.