The Puerto Rico Treasury Department (Hacienda) is providing special relief for distributions and loans from Puerto Rico qualified and dual-qualified retirement plans following Hurricane Maria. Under Administrative Determination (AD) No. 17-29, Puerto Rico residents affected by the hurricane may take distributions from their qualified retirement plans at lower tax rates. Additional relief is available for outstanding plan loans. The relief is particularly relevant for sponsors of 401(k)-type plans qualified under Puerto Rico law. Sponsors of dual-qualified plans will also need to comply with applicable requirements for distributions and loans under the U.S. tax code and the hurricane relief provided by the IRS.
Sponsors that make use of the special relief will need to change their administrative procedures and amend their plans by December 31, 2018. The relief is available for distributions made between September 20, 2017, and June 30, 2018.
Eligible distributions. An eligible distribution is either a lump sum distribution or a hardship distribution (both as defined under regulations issued by Hacienda) made between September 20, 2017, and June 30, 2018. Recipients of such distributions may continue contributing to their plans (i.e., an individual who takes a distribution will not be subjected to any suspension period that otherwise would apply to future contributions following a hardship withdrawal).
Eligible expenses. The expenses may be incurred by an individual or spouse, children or parents. They must be necessary to cover losses or damages caused by Hurricane Maria in Puerto Rico, or extraordinary and unforeseeable expenses for basic needs arising from the storm, which could include repairs of a home or auto, medical care, food, fuel, lodging, generators and more. The requesting participant need not provide a detailed list of the expenses or losses. Although the special relief is available only for distributions made between September 20, 2017, and June 30, 2018, affected plan participants may request distributions before the June 30th deadline for eligible expenses they will incur after that date.
Special tax relief. The first $10,000 of an eligible distribution will be exempt from income taxes and the alternative minimum tax (AMT) under Puerto Rico’s tax code. Eligible distributions over $10,000 will be subject to a flat 10% income tax rate as long as the tax is withheld at the time of the distribution. Otherwise, the distribution will be taxed at the ordinary tax rates, including the AMT. Individuals can take multiple distributions, but the total cannot exceed $100,000. Eligible distributions and withheld tax amounts must be reported on PR Treasury Form 480.7C.
Request for eligible distributions. When requesting an eligible distribution, an individual must provide the plan sponsor or plan administrator with an affidavit that includes the following:
- Applicant’s name and mailing address
- Address of the principal residence of the eligible individual
- Certification of the following:
- The individual is a resident of Puerto Rico and will continue to be a resident of Puerto Rico in 2017 and 2018.
- The request does not exceed the $100,000 limit and is intended for expenses incurred due to Hurricane Maria, including losses, extraordinary expenses for basic needs or the replacement of unearned compensation.
- The applicant either has not received other eligible distributions from other retirement plans or has provided the date and amount of such distributions.
- The applicant either has not received eligible distributions that were not subjected to withholding or has provided the date and amount of such distributions.
- The individual will pay taxes on the distribution if he or she does not fully comply with the rules.
While the plan administrator need not confirm that the distribution is used for eligible expenses or validate the amount of such costs or damages, the administrator must verify that the individual is a resident of Puerto Rico. Following a distribution, the amount available for eligible distributions must be reduced accordingly.
Plan loans. During the eligibility period, retirement plans are allowed to make loans to participants even if the plan terms do not provide for them (although the plan will need to be amended by December 31, 2018).
Plans may modify the terms of loans outstanding as of September 20, 2017, and those disbursed during the eligibility period, allowing participants to stop repayment for up to one year or to extend the loan for another year (thus reducing the payments). Finally, plan loans must still comply with plan provisions and with ERISA, and dual-qualified plans must also comply with the U.S. tax code.
Terms of the plan. Employers aren’t obligated to adopt the provisions in the AD, or they may adopt lower limits or limit qualifying events. Additionally, dual-qualified plans also need to meet requirements for distributions and loans under the U.S. tax code. To that end, AD 17-29 allows such sponsors to limit the changes to their plans so that distributions comply with both the Puerto Rico and U.S. tax codes, and the hurricane relief from the IRS. An amendment that adopts any of the provisions of AD 17-29 is not considered a qualification amendment and so does not need to be filed with Hacienda for an updated determination letter.