Memo to Clients - Retirement Plans Update (2006-13)

MEMORANDUM TO CLIENTS AND FRIENDS
Tax 2006-13
November 2, 2006
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Retirement Plans Update - Part IX

Puerto Rico Legislative Assembly Considering Several Amendments to Provisions Applicable to Retirement Plans

At the present time, the Puerto Rico Legislative Assembly is considering several bills that would, if approved and enacted into law, amend several provisions of the Puerto Rico Internal Revenue Code of 1994, as amended ( the “PR Code”), related with retirement plans:

Senate Bill 269 (“PS 269”)

If enacted into law, PS 269 would increase the annual exclusion from gross income under the PR Code for distributions (other than lump-sum distributions) from employer plans (qualified and non-qualified plans). The annual exclusion would be increased as follows:

PS 269 has been approved by the Senate and the House and, on October 19, 2006, was sent for the Governor’s signature.

House Bill 2710 (“PC 2710")

If enacted into law, PC 2710 would amend Act 87 of May 13, 2006, to:

• extend the “Window Period” for the 5% special tax rate on lump-sum distributions
  from qualified retirement plans on account of separation from service, and the 5% tax prepayment on vested undistributed balances on qualified retirement plans, until December 31, 2006¹;
  
  
• provide that amounts for which the 5% tax has been prepaid may be distributed in a distribution other than a lump-sum distributions (e.g., in-service and age 591/2 distributions); and,
  
  
• specifically provide for distributions from a qualified plan for the sole purpose of the 5% tax prepayment, subject to the terms of the plan (i.e., would require an amendment to the plan).

PC 2710 was approved by a Conference Committee of the House and the Senate. As of the date of this memorandum, it is pending for final approval at both the House and the Senate, before it is sent for the Governor’s signature.

House Bill 3050 (“PC 3050")

If enacted into law, PC 3050 would increase the annual dollar limitation for pre-tax contributions to qualified plans containing a cash or deferred arrangement (i.e., 401(k) / 1165(e) plans) to $10,000 for taxable years 2006 and thereafter.

PC 3050 is currently being analyzed at the Finance Committee of the House.

House Bill 3051 (“PC 3051")

If enacted into law, PC 3051 would increase the annual dollar limitation for “catch-up contributions” to $4,000 for taxable year 2006, and to $5,000 for taxable years 2007 and thereafter.

PC 3051 is currently being analyzed at the Finance Committee of the House.

House Bill 3055 (“PC 3055")

If enacted into law, PC 3055 would increase the annual dollar limitation for pre-tax contributions to qualified plans containing a cash or deferred arrangement (i.e., 401(k) / 1165(e) plans) for taxable years 2007 and thereafter, as follows:

PC 3055 is currently being analyzed at the Finance Committee of the House.

House Bill 3064 (“PC 3064")

If enacted into law, PC 3064, would amend Act 87 of May 13, 2006, to extend the “Window Period” for the 5% special tax rate on lump-sum distributions from qualified retirement plans on account of separation from service, and the 5% tax prepayment on vested undistributed balances on qualified retirement plans, until December 31, 2006.

PC 3064 is currently being analyzed at the Finance Committee of the House.

We will issue a memorandum as soon as we have additional developments to inform.

If you have any questions or comments, or wish additional information regarding these matters, please contact any of the attorneys listed below, members of our Employee Benefits Practice Group:

The content of this memorandum has been prepared by us for information purposes only. It is not intended as, and does not constitute, either legal advice or solicitation of any prospective client. An attorney-client relationship with McConnell Valdés cannot be formed by reading or responding to this memorandum. Such a relationship may be formed only by express agreement with McConnell Valdés.

¹ PC 2710 originally extended the Window Period until November 30, 2006. However, the period was extended during the House and Senate conference until December 31, 2006.