International Issues Affecting Retirement Plans


International issues are an IRS-wide priority. The Office of Employee Plans is focused on addressing existing abuse and preventing abuse going forward.

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Puerto Rico compliance

Basic principles regarding qualification and filing requirements in the United States and Puerto Rico and the impact of ERISA Section 1022(i). This general information should not be cited as legal authority.


Puerto Rico occupies a unique status as a Commonwealth of the United States. It has its own constitution and a system of government very similar to that of most states in the Union.

  • In 1917, Congress granted American citizenship to Puerto Ricans.
  • The Commonwealth of Puerto Rico falls under the jurisdiction of most federal laws of the United States. However, significant taxation differences exist.
  • Puerto Rican residents pay taxes to the Hacienda and pay no income tax to the United States on income earned in Puerto Rico.
  • Social Security taxes apply to residents of Puerto Rico, who are U.S. citizens. All native Puerto Ricans are U.S. citizens by law.

Retirement plan qualification

Under ERISA Section 1022(i) sponsors of pension, profit-sharing, or stock bonus plans created or organized in Puerto Rico with Puerto Rico trusts, are eligible for two types of favorable tax treatment under the Internal Revenue Code:

  • Under ERISA Section 1022(i)(1), if the Puerto Rico plan is exempt under Puerto Rico Code Section 1165 and all of the participants are residents of Puerto Rico, the trust will be treated as exempt under Internal Revenue Code Section 501(a) as if it were part of a qualified plan under Internal Revenue Code Section 401(a). The effect of ERISA Section 1022(i)(1) is to exclude trust income earned in the U.S. from U.S. taxation.
  • ERISA Section 1022(i)(2) provides that a sponsor of a Puerto Rican plan can make an irrevocable election for the plan to comply with all of the Internal Revenue Code's qualification provisions except for the trust situs requirement. An election to maintain an ERISA Section 1022(i)(2) plan enables the plan to cover both U.S. and Puerto Rican employees.

"Dual-qualified" plans have U.S. domestic trusts that cover Puerto Rican employees and qualify under both the Puerto Rico Code and the Internal Revenue Code to provide the Puerto Rican participants with favorable tax benefits.

A retirement plan and any amendments made to the plan, that covers Puerto Rican employees must apply for and receive a letter from the Puerto Rico Hacienda before the plan is qualified under the Puerto Rico Code.

On January 31, 2011, a new Puerto Rico Code was enacted. The new rules generally became effective January 1, 2011, and apply to all qualified retirement plans that cover employees working on the Island, even those plans that are also qualified in the United States. On December 10, 2011, Technical Amendments were made to the Puerto Rico Code to incorporate several changes to the local retirement plan rules.

The Hacienda issued Circular Letter No. 11-10 (as modified by Circular Letter No. 13-02), which describes the statutory changes that must be included in a plan document under the Puerto Rico Code. Plan sponsors of either Puerto Rico-only or dual-qualified plans must adopt these amendments to comply with the Puerto Rico Code by the due date, including any extension, of the employer's Puerto Rico income tax return for the 2013 taxable year.

The Internal Revenue Code and Puerto Rico Code have different requirements for cash or deferred arrangement plans. The major differences are:

  • the method for determining excluded employees under coverage testing;
  • the definition of Highly Compensated Employee;
  • Average Deferral Percentage test, methodology and correction methods;
  • there is no Average Contribution Percentage test in Puerto Rico; and
  • the dollar amount that can be deferred.

Also, Puerto Rico has a lower catch-up contribution limit for participants 50 years of age or older.

Reporting requirements

All pension plans covered by ERISA, including dual-qualified plans, are required to file a Form 5500-series return. Plans that are qualified in Puerto Rico and not in the U.S. should include on line 8 the plan characteristic code 3C - Plan not intended to be qualified under Internal Revenue Code Sections 401, 403 or 408. Enter 3J for U.S.-based plans that cover Puerto Rican residents and are qualified under both the Internal Revenue and Puerto Rico Codes.

All plans that have participants in Puerto Rico must file Form 480.70 with the Hacienda.

Since ERISA Section 1022(i)(2) plans and dual-qualified plans are not exempt from excise taxes, Form 5330 must be filed, where applicable.

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Puerto Rico Technical Guidance

IRS published guidance about Puerto Rico plan sponsors and U. S. dual-qualified plans.

Puerto Rico Plan Assets and Group Trusts

Notice 2012-6, issued on December 19, 2011, expands and extends relief for certain trusts that hold the assets of or transfer assets to plans qualified under the Puerto Rico Code and for governmental retiree benefit plans.

Deadlines for transfers to ERISA Section 1022(i)(1) plans

Deadlines for plans to avoid taxable distribution treatment for asset transfers to Puerto Rico plans, as provided in Revenue Ruling 2011-1, are extended. Qualified plans that:

  • participated in a group trust on January 10, 2011, have until further notice to transfer assets to Puerto Rico trusts treated as tax-exempt under ERISA section 1022(i)(1). Any subsequent deadline would be described in future guidance.
  • benefit Puerto Rico residents, regardless of whether the plan participates in a group trust, may transfer assets to section 1022(i)(1) plans until December 31, 2012.

Without this relief, a transfer from a qualified plan to a Puerto Rico plan, including a plan treated as tax-exempt under ERISA section 1022(i)(1), would be treated as a taxable distribution (Revenue Ruling 2008-40).

Expansion of relief to assets transferred from 81-100 group trusts

As permitted under earlier guidance, an 81-100 group trust can hold assets of a section 1022(i)(1) plan until further notice if the assets were received from a group trust and were held by a qualified plan in the transferor group trust on January 10, 2011. Notice 2012-6 extends this treatment to new section 1022(i)(1) plans created as a result of transfers allowed under the notice, as described above.

Governmental retiree benefit plans

The notice extends the deadline for certain IRC Code section 401(a)(24) governmental plans to amend their governing documents to comply with Revenue Ruling 2011-1 provisions about participating in an 81-100 group trust.

The extension applies to plans that:

  • provide retirement benefits, including retiree medical plans,
  • participate in a group trust, and
  • have a legislative body that meets in legislative session and has the authority to amend the plan.

The extended amendment deadline for these plans is the earlier of the:

  • close of the legislative body's first regular legislative session that begins on or after January 1, 2012, or
  • January 1, 2015.

Additional Technical Guidance

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U.S. Virgin Islands compliance

Frequently asked questions on pension plans in the U.S. Virgin Islands.

Questions and answers

Can the IRS audit U.S. Virgin Island retirement plans?

Yes, the IRS can audit U.S. Virgin Island retirement plans.

Which Internal Revenue Code sections apply to U.S. Virgin Island retirement plans?

Income from the U.S. Virgin Islands is subject to taxation under a "mirror" income tax system. The Internal Revenue Code's procedural rules, regulations and other interpretations of the U.S. Virgin Island's Code are also mirrored in the U.S. Virgin Islands.

Under the mirror system, the U.S. Virgin Islands adopts the U.S. Internal Revenue Code as if it were the territory's code, except that the name of the territory is substituted for the United States, and vice versa. Thus, the income tax requirements for retirement plans under the two Codes are the same. Rules pertaining to estate, gift and excise taxes are not mirrored.

What is the tax effect if Virgin Islands plans fail any qualification requirements?

U.S. Virgin Islands plans may use the EPCRS program to correct any plan failure covered under that program. These plans may self-correct if the provisions of Revenue Procedure 2021-30 are satisfied or may enter into the IRS Voluntary Correction Program. The Director of the Virgin Islands Bureau of Internal Revenue must sign all Virgin Islands closing agreements. The Bureau collects and retains the closing agreement sanction amount.

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Additional resources