Include Puerto Rican residents in plan testing?

[Guest rchambers]

We wonder whether we need to include employees who are residents of Puerto Rico in the 410(B) coverage tests for our 401(k) and other plans. Any insight?

[E as in ERISA]

Has this question ever been answered?

[jaemmons]

I believe that Puerto Rico citizens are considered US citizens, and would therefore be included in 410(B) testing. They are NOT nonresident aliens.

[mbozek]

Residents of Puerto Rico are US citizens and are counted for 410(B) purposes.

[Guest emmyzuck]

Would a Puerto Rico resident ne considered a nonresident alien for purposes of informtion reporting on distributions from a Us quailfied plan? Should a 1099-R be used or a 1042-S?

[jaemmons]

From my understanding, "bona fide" residents of Puerto Rico are still required to file a 1040 for US federal income tax purposes, if they received income from sources within the US. Therefore, a 1099-R should be distributed to them accordingly.

[MWeddell]

Parts of this thread are pretty stale, but let's go back to the original question. If someone is a citizen and resident of Puerto Rico for the entire year and works in Puerto Rico for the entire year, then that person is excludable from 410(B) coverage testing and has no effect on the testing arithmetic. In other words, I disagree with some of the earlier posts.

Treas. Reg. 1.410(B)-6©(1) under certain conditions excludes an employee "who is a nonresident alien (within the meaning of section 7701(B)(1)(B))" from coverage testing. Code Section 7701(B)(1)(B) defines a nonresident alien as someone who is neither a citizen nor a resident of the United States. Code Section 7701(a)(9) provides "The term “United States” when used in a geographical sense includes only the States and the District of Columbia." "State" is also defined to include the District of Columbia (sort of) but apparently doesn't include Puerto Rico. Hence, a Puerto Rican typically is excluded as a nonresident alien from coverage testing. Take a look at the citations above yourself before applying these rules to a specific situation.

[jaemmons]

MWeddell,

If the Puerto Rican residents work and are paid by a US corporation in Puerto Rico, I agree that they would be treated as a non-resident alien. However, if they work in the US, as defined in Publication 519, and meet the "substantial residency" test, it seems that they are a resident alien and as such, would be nonexcludable.

Would you agree, that so long as they are working in Puerto Rico, they are a non-resident alien, but if they work within the US, then a closer look needs to be taken at the residency test?

thanks

[Guest agsmith]

did you know that residents of puerto rico can vote in the presidental primary but not in the actual election...

ok. bye.

[MWeddell]

Jaemmons,

Yes, I agree with your most recent post.

I tried to make clear that my post specifically was addressing a situation where someone resided in Puerto Rico and that if someone were to actually apply the reasoning to a specific case that one should check out the precise conditions in the Code and regulations I cited.

[Guest greggi39]

i read sal's book, page 8.13, 4.c.1, and he says they are treated as non-excludables.

[E as in ERISA]

This article says that Puerto Rico residents are US citizens and are not excludable:

http://www.millimanglobal.com/publications...G_EB_9-2001.pdf

They have their own tax code, so some of the tax rules are different.

[MWeddell]

Yes, for the second time today I'm updating / correcting a stale post on Puerto Rico law.

I had argued that Puerto Rico employees were excluded from coverage testing. Two other posters referred to secondary sources that disagreed with me. Plus the excellent article in the Summer 2003 edition of the Journal of Pension Planning & Compliance also disagreed with my previous position. I was wrong. Puerto Rican employees are not excluded.

Code Section 7701(B)(1)(B) defines a nonresident alien as someone who is neither a citizen nor a resident of the United States. Code Section 7701(a)(9) provides "The term “United States” when used in a geographical sense includes only the States and the District of Columbia." Apparently, when we are talking about a "citizen ... of the United States," we are using the term "United States" in a political not a geographic sense. Hence, the restrictive definition of Code Section 7701(a)(9) doesn't apply and one should interpret "citizen ... of the United States" to include a citizen of Puerto Rico.

Anyway, just in case someone else searches old threads and rediscovers this one, I wanted to revise my position.

[Harwood]

MWeddell -

Thanks for updating us. It is appreciated!