On June 23, 2020, the Puerto Rico Department of the Treasury (commonly known by its Spanish-language name, Departamento de Hacienda de Puerto Rico, or Hacienda) issued Circular Letter of Internal Revenue No. 20-29 (CL 20-29), which extends the due date from June 30, 2020, to December 31, 2020, for the completion of coronavirus-related distributions (CRDs) from retirement plans qualified in Puerto Rico.
The Hacienda rules on CRDs remain exactly as described in Circular Letter of Internal Revenue No. 20-23 (CL 20-23), except for the following two items:
- Going forward, applications for CRDs are not required to be notarized. Recognizing that because of COVID-19 business lockdowns and stay-at-home orders, many plan participants were encountering difficulties securing the services of public notaries (who under local law must be licensed attorneys), Hacienda removed the notarization requirement in Circular Letter of Internal Revenue No. 20-24. Therefore, participants can validly sign or e-sign applications for CRDs, without any sort of notarization or plan administrator attestation. This change has facilitated the electronic completion, execution, filing, and processing of CRD applications.
- As noted above, plan administrators, recordkeepers, and trustees now have until December 31, 2020, to complete CRDs to participants (i.e., not just receive the application, but send the payment, either by mail or electronically). Since plan sponsors have full discretion to offer CRDs and set reasonable rules for their administration, they are not required to extend the due date for the completion of CRDs to December 31, 2020, and can set an earlier due date for the submission of CRD applications.
Plan sponsors interested in extending the due date for the completion of CRDs from their Puerto Rico-qualified plans must first contact the recordkeeper servicing the plan. Judging by the handling of other disaster relief distributions in the past (e.g., distributions related to Hurricane Maria back in 2017), recordkeepers are uniquely positioned to determine the changes that this sort of extension is likely to require to the plan's website, administrative forms, and recordkeeping platform and how best to communicate the new due date to participants.
Plan sponsors may want to be aware that the due date for amending their Puerto Rico-qualified plans in order to formalize the adoption of CRDs was, and remains, December 31, 2020. Hacienda did not extend the amendment adoption due date.
Involuntary Cash-Out Limits
Involuntary cash-outs from retirement plans solely qualified in Puerto Rico (commonly known as "P.R.-only plans") have a different and more favorable limit than the limit that applies to retirement plans that are qualified both in the United States and Puerto Rico (commonly known as "dual-qualified plans"). Both types of plans can be, and are regularly, used for providing retirement benefits to Puerto Rico employees. When it comes to involuntary cash-outs, dual-qualified plans are subject to the rules of both the Employee Retirement Income Security Act (ERISA) § 203(e) and Internal Revenue Code § 401(a)(31), whereas P.R.-only plans are subject only to the rules of ERISA § 203(e).
Given the impact of the COVID-19 pandemic on Puerto Rico's economy, many residents have lost their jobs. As a result, the number of inactive participants in Puerto Rico-qualified plans has increased. Plan sponsors wishing to lower the inactive participant headcount in the interest of controlling plan administration expenses may want to be aware that the limit on involuntary cash-outs applicable to P.R.-only plans remains $5,000, and that such cash-outs do not require transferring any funds to an individual retirement account (IRA).
Also, the limit for involuntary cash-outs from dual-qualified plans is $1,000, and cash-outs between $1,001 and $5,000 must be automatically transferred to an IRA with a United States-based financial institution that will accept the transfer. Cashing-out inactive participants is, therefore, easier under a P.R.-only plan than under a dual-qualified plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.