Puerto Rico issues guidance on withholding, pensions

On November 8, 2017, the Governor of Puerto Rico issued Executive Order No. (OE-2017-67), authorizing the Secretary to establish the tax rules he deems reasonably prudent and necessary so that, during the emergency, residents of Puerto Rico may withdraw savings from their retirement plans and individual retirement accounts at preferential tax rates. Administrative Determination No. 17-29 was then issued to establish: (i) the tax rules under the Puerto Rico Internal Revenue Code of 2011, applicable to cash distributions by reason of the passage of Hurricane Maria by Puerto Rico, from both employee trusts established by private employers under Code Sec. 1081.01 and individual retirement accounts established under Code Sec. 1081.02 (IRAs); (ii) the responsibilities imposed on trustees, administrators and service providers of Retirement Plans and IRAs in terms of the compliance with their responsibilities as withholding agent in Eligible Distributions; (iii) the preferential tax rates applicable Puerto Rico residents who receive Eligible Distributions, and (iv) certain rules applicable to loans to participants in Retirement Plans. (Puerto Rico Administrative Determination No. 17-29, November 15, 2017.)

Requirements for obtaining total relief from withholding addressed.

Administrative Determination No, 17-30 was issued to clarify the term of starting a service activity and when the business is deemed a “new business,” subject to total relief from withholding as provided in Code Sec. 1062.03(b)(8). Payments for services rendered in Puerto Rico are subject to 7% withholding, provided that, in certain cases set forth in Code Sec. 1062.03(b), the 7% withholding will not apply. An individual or entity that begins a “new business” may request full relief from the 7% withholding, subject to compliance with Code Sec. 1062.03(b) and Article 1143(b)(10)-1 of Regulation 5619. To request the relief, the persona must comply with the provisions of Internal Revenue Circular Letter No. 17-02, which provides that to elect the benefit provided in Code Sec. 1062.03(b)(8), the taxpayer must request a Certificate of Total Relief from Withholding at the Source from Payments for Services Rendered from the Department, completing Model SC 2678 or Model SC 2680, as applicable, and filing it at any of the Taxpayer Service Centers, along with any other documents required on the instructions. (Puerto Rico Administrative Determination No. 17-30, November 15, 2017.)

2018 applicable limits for qualified retirement plans.

The limits on contributions and benefits of retirement plans qualified under the Federal Code, which are also applicable to retirement plans qualified under the Code for the taxable year beginning on January 1, 2018, are the following:

  • Limit on Annual Benefits payable to participants in defined benefit pension plans (Section 1081.01 (a) (11) (A) (i) of the Code) — $ 220,000.
  • Limit on Annual Contributions applicable to the accounts of participants in defined contribution plans (Section 1081.01 (a) (11) (B) (i) of the Code) — $ 55,000.
  • Annual Compensation Limit applicable to the computation of benefits under qualified retirement plans (Section 1081.01 (a) (12) of the Code) — $ 275,000.
  • Compensation limit for highly paid employees (Section 1081.01 (d) (3) (E) (iii) (IV) of the Code) — $ 120,000.
  • Limit on Cash or Deferred Contributions applicable to participants in a retirement plan sponsored by the US federal government, and participants in a qualified retirement plan under both Section 1081.01 (a) of the Code and Section 401 (a) of the Federal Code (Section 1081.01 (d) (7) (A) (ii) of the Code) — $ 18,500.
  • Limit on Additional Contributions applicable to participants in a retirement plan sponsored by the US federal government who have reached the age of 50 (Section 1081.01 (d) (7) (C) (i) of the Code) — $ 6,000.

The following limits do not adopt by reference the limits established by the IRS under the Federal Code and remain the same for the taxable year beginning on January 1, 2018:

  • Limit on Cash or Deferred Contributions applicable to participants in a qualified retirement plan only under Section 1081.01 (a) of the Code (Section 1081.01 (d) (7) (A) (i) of the Code) — $ 15,000.
  • Limit on Additional Contributions applicable to participants in a retirement plan not sponsored by the federal government who have reached the age of 50 (Section 1081.01 (d) (7) (C) (i) of the Code) — $ 1,500.
  • Limit on Employee Voluntary Contributions (“voluntary employee after-tax contributions”) applicable to qualified retirement plan participants under Section 1081.01 (a) of the Code (Section 1081.01 (a) (15) of the Code) — ten percent (10%) of the aggregate compensation of the participant for all years of participation in the plan. (Puerto Rico, Circular Letter of Tax Policy No. 17-02, December 15, 2017.)

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