Puerto Rico Pension Feature Codes Misapplied by Plan Sponsors
During its Hacienda project, the Employee Plans Compliance Unit (EPCU) looked at whether plan sponsors properly classified plans covering employees who are Puerto Rico residents. Form 5500 instructions list two Puerto Rico related pension feature codes:
- Code 3C means a plan isn’t intended to be qualified under Internal Revenue Code Sections 401, 403 or 408.
- Code 3J means a U.S. based plan that covers Puerto Rico residents and is qualified under both Internal Revenue Code Section 401 and Puerto Rico Code Section 1165, or is a dual qualified plan.
The responses showed that most of the sampled sponsors misunderstood the Puerto Rico related pension feature codes 3C and 3J. Plan sponsors:
- Intended their plans to qualify only under the Puerto Rico Code because they were Puerto Rico employers covering only employees in Puerto Rico.
- Incorrectly selected code 3C instead of 2C – The Plan sponsors were U.S. employers who didn’t have any employees in Puerto Rico and never sponsored a plan in Puerto Rico but mistakenly selected code 3C but meant to select 2C because they had a money purchase plan.
- Incorrectly provided a Puerto Rico address – Sponsors must provide correct information because they file the return under penalties of perjury.
Sponsors of plans covering employees in Puerto Rico must receive approval from the Puerto Rico taxing authority, the Hacienda. Those plan sponsors can elect to have their plans qualified:
- only under the Puerto Rico Code, in which case they would use pension feature code 3C, or
- under both the Internal Revenue Code and the Puerto Rico Code (dual qualified), in which case they would use pension feature code 3J
EPCU designed the Hacienda project in two phases. In Phase I, they sent contact letters to plan sponsors that filed Form 5500 returns showing they:
- selected code 3C in a subsequent year but not in a prior year, or
- didn’t select code 3C in a subsequent year but selected it in a prior year.
EPCU wanted to learn if sponsors changed their intent for the plan to be qualified or if they simply made the mistake of selecting code 3C in one year but not another.
In Phase II, EPCU sent contact letters to plan sponsors that filed a Form 5500 return with a Puerto Rico address and who:
- didn’t select code 3C or 3J, or
- selected code 3J.
EPCU wanted to learn why those plan sponsors weren’t using a Puerto Rico related pension feature code or if sponsors were correctly using code 3J.
Now may be a good time to review your most recent Form 5500 filing to see if you selected the correct pension feature codes and completed the address portion of the return accurately.
Correct any errors you discover and amend your return, if needed. Correct your plan administrative procedures so the mistakes don’t happen again. It may be helpful if at least two people review your 5500-seres return before you file it.
If you’re a benefits professional, make sure you talk with your clients about the differences between pension feature codes 3C and 3J.
If you have questions about this project, email us and include “Hacienda project” in the subject line.