Two recent pieces of legislation that human resource specialists, and benefits managers in particular, should be mindful of in Puerto Rico are Act 9-2017 and Act 4-2017.
On February 8, 2017, Governor Ricardo Roselló signed into law Act No. 9-2017 (the “Act 9”) which aims to protect, retain and attract professionals to Puerto Rico by providing more flexibility to retirement plans and ease their establishment, and to provide for better protection of trust assets. Act 9 amends the Puerto Rico Internal Revenue Code of 2011, as amended (the “PR Code”), and the Puerto Rico Trust Act, Act No. 219-2012 (the “Trust Act”).
Key amendments of Act 9 include amendments to the Trust Act to (among others) (i) add a new Chapter IV to the Trust Act which provides updated definitions to Retirement Plan Trust; (ii) establish the general rule for beneficiary designations of married participants in Retirement Plan Trusts that the plan beneficiary upon the death of the participant will be the surviving spouse, unless a different beneficiary is designated, subject to required spousal consents under the Employee Retirement Income Security Act of 1974 (“ERISA”); and (iii) provide that property under a PR retirement plan trust will be excluded from PR Civil Code’s provisions for laws of succession and descent.
Act 9 also includes amendments to the PR Code related to tax qualified retirement plans, including: (i) modify the allowed deduction for employer contributions to a defined contribution plan to the amount allowed as contributions to such plans; (ii) increase the allowable employer and employee contributions to a defined contribution plan to the lesser of (i) $75k; or (ii) 25% of “Net Income”; (iii) modify the Highly Compensated Employees definition to include employees who for the prior taxable year obtained compensation from the employer that exceeds $150k (previously $120k)and (iv) elimination of the PR Code discrimination testing for plans with less than 100 participants and less than $10 million in annual gross income, subject to employer providing benefits to eligible employees of at least 3% of the compensation (a.k.a. New PR Safe Harbor Plans).
On the other hand, on January 26, 2017 the Governor also signed into law Act 4-2017, popularly heralded as the “Labor Reform Act” (“Act 4”), which also included certain tax law amendments with respect to severance pay plans, as part of the amendments to Act 80-1976 (“Act 80”) severance payments. Importantly, Act 4 established that Act 80 severance payments (and other dismissal payments) will now be excluded from income taxation and from the definition of “wages”. Since Act 4 also changes the calculation of Act 80 severance payment for employees hired on or after January 26, 2017, employers will need to be mindful not only about the tax implications on their severance payment programs, but also the way they calculate such severance.
