By: René Avilés García, Esq. (Ferraiuoli LLC)
The PR Treasury issued PR Treasury Circular Letter 20-23 to authorize disaster relief distributions from PR tax qualified retirement plans to alleviate losses or damages suffered by participants during the COVID-19 pandemic.
The authorization is granted pursuant to an amendment to an existing guidance (PR Treasury Circular Letter 20-09) to authorize for distributions for the recent earthquakes that impacted certain regions in Puerto Rico in January 2020. The new guidance includes the COVID-19 disaster relief as ADDITIONAL reasons to authorize disaster distributions under Circular Letter 20-09.
What are the Tax Benefits of Disaster Relief Distributions?
Under the combined relief, sponsors of PR tax qualified retirement plans may authorize disaster relief distributions to assist in covering losses or damages during either the recent earthquakes or the COVID-19 pandemic, until June 30, 2020, at special tax rates as described above:
- First $10,000 (at 0% PR income tax rate);
- Excess over $10,000 up to a maximum amount of $100,000 (at a special 10% PR income tax rate).
What can Plan Sponsors and Administrators Do?
Plan Sponsors that HAVE NOT authorized disaster distributions for earthquakes: can now re-evaluate their situation and determine if they would want to authorize these distributions now, prior to the sunset of the distribution relief on June 30, 2020.
Plan Sponsors that HAVE authorized disaster distributions for earthquakes: can now determine to incorporate COVID-19 as part of their disaster distributions and/or expand disaster distribution provisions (if not all provisions were originally adopted). It is important to note that this new relief does not represent additional amounts subject to disaster relief, but only additional reasons for disaster distributions to the ones originally stated for the earthquake disaster.
In any case, all Sponsors and Administrators should be aware that these disaster provisions are optional. Which means that Sponsors and Administrators are not legally required to adopt such provisions (for example sponsors of defined contribution plans may wish to allow for these distributions, but sponsors of defined benefit plans may elect not to do so).
Other Issues to Consider
Sponsors of certain tax qualified plans in both PR and USA (aka Dual Qualified Plans) will want to consider coordination of disaster relief provided under PR Treasury Circular Letter 20-23 in conjunction with separate and independent relief provided under the CARES Act for US tax qualified plan.
In any case, all Sponsors/Administrators that wish to allow for these distributions will want to consider sworn statement requirements in order to move forward with distribution requests under CL 20-23.