US plan with one Puerto Rico resident

[K2retire]

I'm working with a takeover client whose understanding of their existing plan provisions is consistently proving to be incorrect. Among other things, the HR director told us that it was not a safe harbor plan, and that the owner could not defer. The document clearly shows that it has a basic safe harbor match. Further discussion with the HR director brought up the fact that, for tax purposes, the business owner is a resident of Puerto Rico. He maintains homes in both Kansas and Puerto Rico and works part of the year from each location, but his primary residence is Puerto Rico.

I know there are a number of different rules about Puerto Rico plans, but I'm having a hard time finding information about US plans covering Puerto Rico residents. Other than the lower deferral limit, can anyone point me to information that I need for this situation? Does the work done while in Puerto Rico need to be treated differently than the work in Kansas, or is it strictly based on where the participant files their taxes?

[ETA Consulting LLC]

There is no difference in the qualified plan with respect to the "Participant's" eligibility to participate; since Puerto Rican residents (and citizens) are "NOT" considered "aliens". Hence, "eligibility" under the plan is not affected.

There are tax implications to the individual as to whether it would be in his best interest to defer with income received in Puerto Rico; since the plan's trust is in the United States.

Good Luck!

[Guest ghal]

This link may help. I have been working on a similar situation, rather than creating a dual qualified plan we are looking in to setting up a Puerto Rico only plan.

http://www.irs.gov/Retirement-Plans/EP-Exa...erto-Rico-Facts

This link details many of the differences between the Hacienda and IRS:

http://www.groom.com/media/publication/117...ement_Plans.pdf

I hope that helps.

CPC, ERPA

[K2retire]

Thank you both. That actually brings up a new question. The plan is not a dual qualified plan at this point. Someone has been assuming that so long as the owner doesn't defer, that takes care of the problem. (Not sure if that someone was the client, their prior TPA, their CPA or someone else.) But since he is technically eligible for the plan, whether he defers or not, do we need to either become dual qualified or amend the plan to exclude him?

[Guest ghal]

I agree with ErisaToolKit that he would be counted for coverage - see below. I don't have a reference on whether or not you have to be dual qualified if he does not defer.

http://www.irs.gov/irb/2008-30_IRB/ar11.html:

4. Application of section 410(b) to U.S. plans of employers with excluded Puerto Rico employees. (a) Background. Section 410(b) requires the sponsor of a qualified plan to include all employees in testing coverage regardless of whether the employees benefit under the plan. Section 410(b)(3) provides certain exceptions to this coverage requirement, such as § 410(b)(3)© which permits the exclusion of nonresident aliens who receive no U.S.-sourced earned income from the employer. However, employees in possessions of the United States, such as Puerto Rico, are not excluded from coverage testing under § 410(b)(3)© because they generally are not nonresident aliens. Section 410(b) also precludes the aggregation of a nonqualified plan, such as a plan qualified only under the Puerto Rico Code, with a qualified plan for purposes of testing coverage.

[K2retire]

Since he's an HCE, coverage won't be a problem.

[k man]

i posted in another post but this one looks recent on the subject. i need to know what the tax consequences for the one PR employee in the US plan are. what are the contribution limits>? i know it is subjec to us tax but how is that determined and reported?