Retirement Plan Issues for U.S. Territories - Puerto Rico

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TEMPLEMAN: Hello.

I'm Monika Templeman, Director of Employee Plans Examinations.

Our EP international focus is necessitated by the increasing number of U.S. companies that have employees working abroad and in the U.S. territories.

Clearly, the global economy has an impact on employee retirement plan benefits.

Accordingly, an increasing number of EP examination cases have issues relating to the movement of funds and workers between the U.S. and the territories or overseas jurisdictions.

As globalization expands, EP is challenged by international and U.S. territory non-compliance, lack of information reporting on many cross-border transactions, the ease of using complex international structures and constantly evolving compliance issues.

The fast-paced change in the global economy requires an equally fast-paced change within IRS Employee Plans.

EP international activities span the gamut, from issues involving huge multinational corporations and high wealth taxpayers to issues involving money and taxpayers across the board in all formats, including IRAs maintained by retirees in the U.S. territories and overseas.

Approximately 17.4 trillion with a "T" in dollars are invested in the million-plus retirement plans that cover over 90 million participants.

EP is concerned about tracking the trust records and assuring they're being used exclusively as retirement benefits for plan participants.

To ensure compliance, we continue to expand coverage of international issues related to multinational corporation activities, assets sheltered offshore, and U.S. taxpayers abroad and in the U.S.

Territories, at all economic levels.

Puerto Rico occupies a unique status as a commonwealth of the United States.

The Commonwealth of Puerto Rico falls under the jurisdiction of most federal laws of the U.S.

However, significant taxation and retirement plan differences do exist.

These differences affect employee retirement plans and their benefits.

What I'd like to share with you today are the reoccurring errors that agents are finding in these examinations and tips on how to find, fix, and avoid these errors.

Section 412 of ERISA requires that most plans have a fidelity bond in the name of the plan that provides insurance to an ERISA plan in the event of fraud or dishonesty.

The fidelity bond serves to protect the plan from losing any valuable plan assets if the people that handle the plan assets prove to be dishonest.

It covers all individuals, including fiduciaries that handle plan assets.

To find this error, review Section 412 of ERISA to determine if the plan needs to have a fidelity bond.

If so, ensure that it's in the plan's name and in the proper amount required.

The fidelity bond must be equal to at least 10% of the value of the net assets at the beginning of the year.

The maximum fidelity bond required is $500,000 unless the plan's assets are invested in the sponsoring employer's securities, in which case the maximum fidelity bond is increased to $1 million.

Fix this error by obtaining a fidelity bond in the name of the plan in the amount required.

If you already have a fidelity bond, increase it to at least the 10% minimum.

To avoid this error, we recommend you review the plan assets and fidelity bond at the beginning of each plan year to ensure that the bonding requirements are being met.

All plans that are subject to U.S.

Internal Revenue Code Section 401A qualification requirements need to comply with all changes in the law and be timely amended to be qualified.

The IRS establishes deadlines by which amendments that reflect law changes must be adopted.

Plans not timely amended are no longer considered qualified retirement plans and may lose their favorable tax treatment.

The IRS publishes a cumulative list of changes in plan qualification requirements toward the end of each year.

This list is found on our Website.

Review the annual cumulative list to verify that the plan has been updated to reflect all required law changes.

Fixing this error involves adopting amendments for any missed law changes.

If this error is discovered during an examination, it may be corrected by using the Audit Closing Agreement Program, which includes a sanction payment.

If the plan isn't under examination, a Voluntary Correction Program submission may be submitted to the IRS.

A fee will be charged to correct this error when using the VCP, or Voluntary Compliance Program, as we call it.

To avoid this error, employers should review the plan document and cumulative list annually.

Ensure that any plan amendments are executed timely.

Employers should keep signed and dated copies of the plan document and all amendments on file at all times.

If you're unsure if your plan has to be amended, consult with outside counsel or visit our Website.

All Puerto Rico plans are required to apply for a favorable determination letter from the Hacienda.

This applies for new plans, as well as amendments and terminations of plans.

Failure to timely amend a plan will cause the plan to lose its tax-qualified status in Puerto Rico.

To find this error, review your files and ensure that you have a favorable determination letter from the Hacienda for your initial plan adoption and all subsequent amendments.

To fix this error, I suggest you contact Hacienda for information on what's required to correct the plan.

Avoid this error by reviewing Hacienda determination letter procedures and remembering that changes in the plan document require an application for a Hacienda determination letter.

A plan characteristic code is meant to identify whether a plan is intended to be qualified under U.S. Internal Revenue Code Section 401A.

The plan characteristic code is often used incorrectly or left blank.

Failure to use the proper code could result in an audit.

To find this potential error, review line 8a of Form 5500.

A plan that is not intended to be qualified under U.S.

IRC Sections 401, 403, or 408 should enter code 3C on this line.

A U.S.-based plan that covers residents of Puerto Rico and is qualified under both Code Sections 401 and the Puerto Rico Code should use code 3J.

This error can be fixed by filing an amended Form 5500 to correct the plan characteristic code.

Avoid this error by having plan sponsors or anyone who prepares the Form 5500, review procedures to ensure that the correct code is used.

Prior to the enactment of the 2011 Puerto Rico Code, aggregation of plans for purposes of minimum coverage tests or general non-discrimination tests on benefits and contributions of members of a controlled group was optional.

The only requirement was that if an employer decided to aggregate plans for any of these tests, they had to do so also for purposes of the ADP test.

The 2011 technical amendments to the Puerto Rico Code clarified that only employers with non-excludable employees based in Puerto Rico have to aggregate plans for purposes of meeting the qualification requirements of the Puerto Rico Code.

The U.S. Internal Revenue Code, on the other hand, requires aggregation of all the non-excludable employees of members of the same controlled group of corporations, trades, or businesses under common control, or all members of an affiliated service group.

If the employees aren't correctly included in the tests according to the definition of Puerto Rico, this could result in the plan losing its qualified status in Puerto Rico.

Likewise, for purposes of U.S. tests, employees should be aggregated according to the U.S. Code requirements.

To find this error, review the payroll and census information to ensure that two different tests are being run -- one for Puerto Rico and one for the U.S. using the proper aggregation required for each.

To fix this error, determine if the employees were correctly included in the coverage and non-discrimination tests.

If not, include the proper employees and run new tests using the correct aggregation.

If the plan fails the tests again, the plan sponsor should contact Hacienda and use EP's Voluntary Correction Program to make the necessary corrections as long as this is done prior to an examination.

To avoid this error, employers should implement administrative procedures to ensure that all non-excludable employees that are members of the same controlled group according to the definition of the U.S. code are included in all the U.S. coverage and non-discrimination tests.

We'll continue to develop capabilities to address key international, global, and U.S. territory issues affecting the Employee Plans sector.

Working through and collaborating with Large Business and International, or LBI, the IRS lead division for International, our goal is to continue to expand our international enforcement coverage, identify new international issues, provide online Web materials and, most importantly, ensure effective global and U.S. territory tax administration to better serve the EP community.

For more information, follow us on the Web at www.IRS.gov/retirement.