The document summarizes changes to Puerto Rico's tax code regarding qualified retirement plans. Some key changes include increasing the employer deduction limit for stock-bonus and profit-sharing plans to 25% of compensation, raising the annual limit on employee pre-tax contributions to retirement plans, and establishing new annual compensation limits and contribution/benefit limits similar to those in the U.S. federal tax code. The new Puerto Rico tax code aims to reform qualified pension rules and align certain provisions with U.S. tax code limits.

1. Tax Reform
One of the major
The new Puerto Rico Internal Revenue Code changes brought by
and its impact on qualified retirement plans the New PR Code is the
By René J. Avilés-García
inclusion of rules
O
n Jan. 31, the governor of Puerto Rico Impact on employer-deduction limits
signed into law the Internal Revenue Code
for a New Puerto Rico (the New PR Code),
The New PR Code brought some important similar to those ap-
changes in relation to employer-deduction limits.
the largest piece of tax legislation in Most welcomed is the increase in the stock-bonus plicable under the
Puerto Rico in more than 15 years. The New PR Code and profit-sharing-plan employer deduction to 25%
also brings the most significant reform of qualified (from 15% under the previous PR Code) of com- U.S. federal tax code
pension-plan rules in Puerto Rico in recent history. pensation paid or accrued during the tax year to
employees under the plan. regarding annual com-
Impact on employees
One of the most discussed changes is the increased New limits on compensation, annual benefit pensation limits...
participant pretax contribution on so-called 401(k) or and annual contributions
1165(e) retirement plans. Participants were already One of the major changes brought by the New PR
eligible to defer up to $9,000 (in 2009) and $10,000 Code is the inclusion of rules similar to those appli- aggregation rules for members of a controlled group,
(in 2011) in compensation as pretax contributions to cable under the U.S. federal tax code regarding an- (iii) new coverage testing rules in the case of certain
such plans under the prior PR Code. The New PR Code nual compensation limits, benefit limits for defined- corporate acquisitions or dispositions, (iv) permissible
includes additional deferral increases in 2012, 2013 benefit (D/B) plans and annual additions limits for partial rollovers, and (v) new penalties for noncompli-
and thereafter. It also increases the catch-up contri- defined-contribution (D/C) plans. These new rules ance. Most of these changes are effective beginning
bution limits for participants ages 50 and above, and begin to apply for tax years commencing in 2012. in 2011.
coordinates limits for federal employees in Puerto The new annual compensation limit is $245,000.
Rico, in accordance with U.S. tax-code limits. The This means that in order to be qualified under the New favorable ruling requirement from
new rules are summarized as follows: New PR Code, a pension plan may not take into P.R. Treasury
account compensation in excess of this limit for Given the substantial statutory changes, the New
YEAR PRETAX LIMIT CATCH-UP LIMIT purposes of determining benefits or contributions, PR Code also incorporates a requirement for quali-
From left: Laura Beléndez-Ferrero; Katherine González-Valentín, chair of the Labor & Employment Division; José Rovira-Rullán; Pedro Notario-Toll, chair of the Tax Law Division; Boris Jaskille; Jorge San Miguel, fied plan trusts to request and obtain an updated,
or conducting discrimination testing for tax years
chair of the Environmental Law, Energy & Land Use Division; Eugenio Torres-Oyola, chair of the Intellectual Property Division; Fernando Rovira-Rullán, chair of the Corporate & Real Estate Division; 2010 $9,000 $1,000
Víctor Rodríguez-Martínez; Juan Rivera-Font, chair of the Litigation Division; Eduardo Tamargo-Motroni; Yolanda Álvarez-Cruz; and María Judith Marchand-Sánchez beginning in 2012. In addition, there are new limits favorable determination from the local Treasury
2011 $10,000 $1,000
on annual benefits, the lower of (1) $195,000; or (2) Department as to the retirement plan’s qualified
2012 $13,000 $1,500
2013+ $15,000 $1,500 100% of the highest three consecutive-year an- status under the New PR Code. This rule applies for
Firm Profile:
Number of Partners: 16
Ferraiuoli LLC The New PR Code also eliminates the coordination
nual average compensation for D/B plans, expressed
as a straight life annuity with no ancillary benefits.
tax years commencing in 2012, and guidance from
Treasury is expected in terms of its implementation
T
of pretax contributions under qualified plans and Another change involves annual contribution limits: and interpretation.
Number of Associates: 11 he late Blas Ferraiuoli-Martínez, along with year for 2011 by Chambers and Partners. This recogni- the lower of (1) $49,000, or (2) 100% of the annual
IRAs (individual retirement accounts) in Puerto Rico. René J. Avilés-García is a member of Ferraiuoli LLC and chair of
Number of Counsels: 1 Eugenio Torres-Oyola and María Marchand- tion, earned in such a short period of time, is a tribute participant compensation for D/C plans. the firm’s Employee Benefits Practice Group. You can contact him
Under the prior PR Code, each dollar contributed as
Sánchez founded Ferraiuoli LLC (FLLC) in to FLLC’s business model. These changes are applicable for tax years be- at raviles@ferraiuoli.com.
Year Founded: 2003 a pretax deferral reduced the available IRA contribu-
2003. Joined by Fernando J. Rovira-Rullán in In spite of the economic slowdown, FLLC has ginning in 2012.
Areas of Legal Practice: tion for the corresponding participant by an equal
2004, the founding core of FLLC was set. Since then, experienced growth. This year alone, 12 new at- Certain aggrega-
Intellectual Property, Corporate & Real Estate; amount. For participants who made pretax contribu-
the firm has grown exponentially to its current size torneys joined FLLC, including incoming partners tion rules apply
Taxes; Labor & Employment Law; Commercial tions of $5,000 or more for a particular year to a tax-
Litigation; Environmental, Energy & Land Use;
of 28 attorneys with a support staff of 12. FLLC has Jorge L. San Miguel, Víctor Rodríguez-Martínez under most of the
qualified 401(k) or 1165(e) plan in Puerto Rico, that
Government Affairs also developed from initially being known as an and Lillian Mateo, three of Puerto Rico’s preemi- changes.
meant they couldn’t make local IRA contributions on
intellectual-property and corporate-law boutique nent environmental, energy and government-af-
Representative Clients: their own behalf under the prior PR Code. Beginning
firm to a multiservice law firm that handles most fairs attorneys. The recent addition of René Avilés Other changes
Rocket Learning, Inc., Wireless Idea, Netxar, in 2011, pretax elective deferrals don’t reduce limits
ARB, Inc., Popular, Inc., Government Development matters relevant to businesses while continuing to adds significant depth to its high-performing tax
on local IRA contributions, which remain constant at The New PR
Bank, MMM Healthcare, Inc., Coca Cola Puerto Rico earn praise for its strong intellectual-property and practice; and Katherine González, who will guide
$5,000 per person. Code also incorpo-
Bottlers, Puma Energy corporate practices. a new Employee Benefits practice area, brings
In terms of participant distributions, the New PR rates many other
Website: www.ferraiuoli.com FLLC has been ranked by the professional publica- additional strength to an already strong Labor &
Code extended the lump-sum taxation rule to distri- changes to quali-
tion Chambers Latin America as a leading law firm Employment practice group. Additionally, Edu-
Location: Hato Rey butions in the case of plan terminations. There is also fied pension
in Puerto Rico in intellectual property, corporate, ardo Tamargo joined FLLC’s Corporate Division
a new 10% tax withholding on nonlump-sum distri- plan administra-
real-estate and tax law. Moreover, five FLLC partners after having worked in corporate, banking and
butions (excluding after-tax portions) upon separation tion. Among oth-
have been ranked as leaders in their field by the same real-estate matters as a name partner in Malley,
from service, and for in-service/hardship withdrawals. ers, there are:
publication. Currently, FLLC is on the list of four nomi- Tamargo & Meléndez-Sauri LLC and Cotto Malley From left, Ferraiuoli LLC Capital Members:
This is a most time-sensitive change, as its impact is (i) a new definition of highly compensated employees Víctor Rodríguez-Martínez; Eugenio Torres-Oyola;
nees, along with three other well-established, larger & Tamargo LLP, as well as being a partner in the
applicable for distributions made during 2011. for coverage and discrimination testing, (ii) new Fernando Rovira-Rullán; and Jorge San Miguel Ferraiuoli
law firms, to be named Puerto Rico law firm of the Corporate Division of McConnell Valdés.
6 • Legal Eagles 2011 Legal Eagles 2011 • 7