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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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My employer has sponsored a 401(k) plan in Puerto rico for

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My employer has sponsored a 401(k) plan in Puerto rico for employees working there. Now it is going to terminate that plan and put us in the US plan. We're told our PR funds can't roll over into the US plan and all loans need to be repaid by year's end or be treated as a distribution. Why can't the funds be rolled over? Same employer, same employees, same compensation. Lots of money will be lost to the retirement plan!

Lev :

Hi and welcome to our site!
The issue is that 401(k) plans in Puerto Rico and in the US are created under different statutes.
It is possible to have so-called - dual-qualified” plans that qualify under both the Puerto Rico Code and the Internal Revenue Code to provide the Puerto Rican participants with favorable tax benefits.
However - all plans are different - and most likely because that plan doesn't qualify for IRS regulations - funds may not be rolled over to US qualified plans.
To be precised - your plan documents must be examined - but based on your information - that is most likely the reason.

Lev :

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.
If you request a copy of that form 5500 from your plan administrator - we may verify that.

Lev :

This publication provides details many of the differences between the Hacienda and IRS as that related to retirement plans -
http://www.groom.com/media/publication/1171_BLJ_Puerto_Rico_Qualified_Retirement_Plans.pdf
Sorry if you expected differently.

Customer:

If the plan is dual qualified would we be able to rollover the funds over to the US plan?

Lev :

Yes - that is correct - for dual qualified plans rollover is allowed to the US qualified plan.
See here - http://www.irs.gov/pub/irs-drop/rr-08-40.pdf

Customer:

Is that a costly or complicated process to do? I'm wondering why it wasn't done so this big problem could have been avoided.

Lev :

The transfer itself is not costly - that is a simply transfer of the money from one account to another.
However - if the US plan will be accept funds from - that is based on plan documents - they are not required to accept such transfers.

Customer:

No, I meant for the plan to be dual qualified

Lev :

Yes - that is correct - the IRS allows the transfer but may not require the plan administrator to accept that transfer.

Customer:

if I understand you the problem is that the PR funds are not qualified. that's why the US plan won't take them. But if the PR plan was dual qualified in PR and in the US then the US plan could take the PR funds as a roll over and the loans could follow the funds into the US plan and not have to be repaid in two months

Customer:

so I was asking what the process is to have the PR plan dual qualified. is that process costly and complicated or was it something that should have been done at the start. simply paperwork?

Lev :

I may not say if that is a qualified plan or not - but I suspect that it is not qualified - and that might be reason. But even if that is a dual qualified plan - the 401k plan in the US might not willing to accept the transfer for their internal reasons. We may not know that. But in this case they are allowed to accept such transfers.
To have the plan qualified under the IRS regulations - your employer must apply to the IRS and verify that all requirements are met. That is not a simple application and most employers hire third party providers to do that work. Also - if there are discrepancies in plan documents - that are likely - changes are required - and that changes must be registered with Hacienda. So that would not be a simple paperwork procedure and will take some time - I would estimate at least 6 months.

Customer:

I was thinking more about the time when the plan was created. Whether there were elections or forms to be filed to make the PR plan dual qualified. I understand that it might not be possible now. But whether there was a way then to have avoided this big problem now by better planning. Whether dual qualification is a routine status or does The PR tax authority make it difficult. Try to keep the money in PR

Lev :

That is mainly the issue with your employer - not PR taxing authorities.
While to comply with both laws - means additional limitations on that plan and more difficult procedures to comply.

Customer:

ok so the answer is that theoretically there is such a thing as a dual qualified plan but not much can be said about how that status is achieved and beyond that it's complicated and everything depends on other facts.

Customer:

but that without dual qualification PR funds can't be rolled into a US plan -- I guess that's the only definite answer

Lev :

Unfortunately - that is correct - if the plan doesn't qualify under the IRS regulation - funds may not be rolled over.

Customer:

ok thanks

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