Employee Plans Compliance Unit (EPCU) - Completed Projects - Projects with Summary Reports - Hacienda Project
The Employee Plans Compliance Unit (EPCU) designed the Hacienda project (Project) to determine whether sponsors were properly classifying plans covering employees in Puerto Rico.
The Project continues EPCUs focus on international issues including pension plans maintained in U.S. Territories. Puerto Rico is the only U.S. territory whose sponsors can qualify their plans under the Internal Revenue Code (IRC).
Sponsors of plans covering employees in Puerto Rico can elect to have their plans qualified:
- Only under the Puerto Rico Code – pension feature code 3C, or
- Under both the IRC and the Puerto Rico Code (dual qualified) – pension feature code 3J.
Results (Two Phases)
The responses showed that most of the sampled sponsors misunderstood the Puerto Rico related pension feature codes 3C and 3J.
Plan sponsors use pension feature code:
- 3C if they intend their plan to be qualified only under the Puerto Rico Code and not the IRC.
- 3J if they intend their plan to be qualified under both the Puerto Rico Code and the IRC (dual qualified).
Phase I of the Project began in March 2011. We sent contact letters to a plan sponsors that filed Form 5500 series returns that showed they:
- Selected code 3C in a subsequent year but not in a prior year, or
- Did not select code 3C in a subsequent year but had shown in it a prior year.
We wanted to see if sponsors were changing their intention regarding the plan’s qualification or if they were making mistakes by selecting 3C in one year but not another. For example, if the sponsor selected pension feature code 3C for the plan’s characteristic on the 2009 Form 5500 series return but didn’t select it on the 2008 Form 5500 series return and vice versa.
In Phase II of the Project, we sent contact letters to sponsors that had an address in Puerto Rico and:
- Did not select code 3C or 3J, or
- Selected code 3J.
We wanted to see why those plan sponsors were not using a Puerto Rico related pension feature code or if sponsors were correctly using code 3J.
For both Phases, the results showed that the sampled plan sponsors:
- Intended their plans to qualify only in Puerto Rico, and
- Did not understand when to select codes 3C or 3J.
In addition to continuing our partnership with the Puerto Rico taxing authority, the Hacienda, we recommended clarifying the instructions for the Form 5500 series return to provide a more detailed explanation of the Puerto Rico related pension feature codes.
- Some sponsors provided incomplete or inaccurate addresses on the Form 5500 series return. Sponsors must provide correct information since they file the return under penalties of perjury and subject to other penalties
- Some sponsors incorrectly selected code 2C instead of 3C. Pension feature code 2C describes the money purchase plan, a type of defined contribution plan.
Sponsors of plans covering employees in Puerto Rico must receive approval from the Hacienda. The Puerto Rico Code requires all plans to comply with ERISA. Therefore, whether or not sponsors intend their plans to be dual qualified, under ERISA they are required to file a Form 5500 series return.
The contact letters were available in both English and Spanish, and a bilingual employee was available to speak with plan sponsors and their representatives if they had any questions.
We asked sponsors questions about their plans to learn whether they are complying with their annual reporting and plan qualification requirements. If they are not in compliance, then the potential exists for:
- Plan disqualification,
- Discrimination in favor of highly compensated employees, and
- Administrative penalties.