On June 22, 2020, the Puerto Rico Treasury Department (“PRTD”) issued Internal Revenue Circular Letter 20-29 (“IRCL 20-29”) to extend the period until December 31, 2020 during which an individual may receive distributions for disaster relief (“Disaster Relief Distributions”) on a tax-free basis or at a reduced tax rate from PR qualified retirement and individual retirement plans as a result of the earthquakes that have been hitting Puerto Rico since late 2019 and the coronavirus disease 2019 (“COVID-19”) pandemic.
Disaster Relief Distributions
Under Sections 1081.01(b)(1)(D) and 1081.02(d)(1)(I) of the Puerto Rico Internal Revenue Code of 2011, as amended (PR-IRC), Disaster Relief Distributions made from a qualified retirement plan or an individual retirement account to an eligible individual (“Eligible Individual”)1 during a period (“Eligibility Period”) for which the Governor of Puerto Rico has issued a disaster declaration (“PR Governor Disaster Declaration”) to cover for Eligible Expenses(as defined below) are not be subject to any early distribution penalties and would be taxed to the beneficiaries as follows:
- Tax free for distributions of up to $10,000
- 10 percent flat tax for distributions in excess of $10,000 and equal to or less than $100,000
Notwithstanding this, distributions made in excess of $100,000 in the aggregate during the Eligibility Period will be treated as ordinary distributions subject to regular PR income taxes as well as to any early distribution penalties, if applicable. In addition, for purposes of determining the $10,000 and $100,000 amounts, all distributions made from one or more qualified retirement plans and one or more individual retirement accounts are to be aggregated.
“Eligible Expenses” are all expenses that an individual incurs to cover for losses or damages suffered as a result of a disaster in the area in which the individual resides, which is covered by a PR Governor Disaster Declaration, as well as for extraordinary and unforeseen expenses to cover for basic needs as a result of such disaster.2
On February 19, 2020, the PRTD issued Internal Revenue Circular Letter 20-09 (“RCL 20-09”) to provide that the Eligibility Period to make Disaster Relief Distributions to an Eligible Individual to cover for Eligible Expenses with respect to the PR Governor Disaster Declaration issued on January 7, 2020 in respect of the earthquakes that had been hitting Puerto Rico since late 2019 would be between February 20, 2020 and June 30, 2020.
Under IRCL 20-09, the meaning of the term Eligible Expenses is explained as including expenses incurred in repairing any damages to a residence, commercial establishment or motor vehicle; costs incurred in verifying the structural integrity of property as well as in repairing property to comply with construction code standards, costs incurred in acquiring a new principal residence or a commercial establishment, medical expenses, replacing and repairing real estate, purchasing food and fuel, purchasing or repairing power generators or lodging and food expenses, among others.3
On March 29, 2020, the PRTD issued Internal Revenue Circular Letter 20-23, to amend IRCL 20-09 to provide that distributions made from March 29, 2020 to June 30, 2020 to Eligible Individuals to cover for Eligible Expenses, as defined in PR-IRC Sections 1081.01(b)(1)(D) and 1081.02(d)(1)(I) as well as in IRCL 20-09, and loss of income as a result of the pandemic also would qualify as Disaster Relief Distributions.
IRCL 20-29 extends until December 31, 2020 the Eligibility Period to make Disaster Relief Distributions to Eligible Individuals to cover for earthquake or COVID-19 pandemic Eligible Expenses.
PR information reporting for Disaster Relief Distributions
Employers will be required to report Disaster Relief Distributions made to an employee out of a qualified retirement plan during calendar year 2020 on Form 480.7C, Informative Return – Retirement Plan and Annuities, on or before February 28, 2021. Employers will be required to report the first $10,000 as an exempt distribution on the corresponding box for Disaster Relief Distributions,4 and any excess, but up to $100,000, as a taxable distribution on the corresponding box for Disaster Relief Distributions. Any distributions made in excess of $100,000 during calendar year 2020 will have to be reported as non-Disaster Relief Distributions on PR Form 480.7C. In addition, Disaster Relief Distributions made from an individual retirement account are to be reported on a PR Form 480.7, Informative Return – Individual Retirement Account, by the institution where the Eligible Individual holds such an account.
The information in this alert is current as of July 8, 2020. Given the nature of this situation, new measures are continuously being implemented. If you have any questions regarding this alert and its implications, please contact any member of DLA Piper’s San Juan office or your DLA Piper relationship attorney.
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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.
1 An eligible individual is an individual who is a bona fide resident of Puerto Rico during the entire 2020 calendar year.
2 The fact that the such expenses have been paid by the spouse, descendants or ascendants of the participant or beneficiary, will not invalidate their eligibility.
3 It is not necessary for the plan participant or beneficiary to submit a detail of the expenses incurred or losses suffered as a result of the earthquake.
4 PR Form 480.7C for calendar year 2020 was not available at the time of publication of this alert. However, on PR Form 480.7C for calendar year 2019, the corresponding box to report Disaster Relief Distributions was Box 21.