Puerto Rico Resident

[Nassau]

The ABC Plan has a participant contributing to the plan who lives in Puerto Rico. (The client does not have a Puerto Rico plan). The PR resident has contributed $16,500 year to date. The client contacted me to determine if this participant should only have contributed the maximum based on the Puerto Rico limits or if the participant can contribute the 402g limit. The plan document does not address this or exclude this participant from eligibility.

I have two questions:

1) Does the plan need to be dually qualified to let a resident of Puerto Rico contribute?

2) If he can contribute, is he subject to the PR limits?

[ETA Consulting LLC]

The answers to your questions (from a qualified plan operational perspective) are simple.

1) Nothing from the plan design changes.

2) He is subject to the plan's limit; not the PR limit.

Now!!! Things may be very different from a personal income perspective (where the employees only advantages are from a PR Tax law). The overidding factor is that the PR resident (citizen) would be exempted from US income from non-US sources (where this qualified plan clearly does not qualify). So, in essence, he's deferring to the US plan to have to pay tax on amounts that are ultimately distributed (a tax that he would otherwise not have to pay had he taken the income and not deferred).

Good Luck.

[PensionPro]

Just to make sure I understand ... a PR employee's contribution to a plan that is not qualified under the PR code is taxable in PR when contributed and those contributions are taxable under the US code when distributed? Surely I am missing something ...

[ETA Consulting LLC]

No. I'm saying that I don't know much about the PR Tax code. However, under the US Tax Code, PR residents are not taxed on income that is not from US Sources. So, if the PR resident contributes to a US plan with a trust in the United States, they will now be subject to US income tax that they would've not otherwise have been taxed on.

Hence, PR employees typically take advantage of PR plans that set up specially for PR employees with trust in PR. The problem becomes when they take a distribution from a plan with a trust inside the US, they will become subject to US income tax.

Good Luck!

[PensionPro]

Thanks for taking the time to clarify, it is much appreciated.