On Jan. 31, the governor of Puerto Rico signed into law the Internal Revenue Code for a New Puerto Rico (the New PR Code), the largest piece of tax legislation in

Puerto Rico in more than 15 years. The New PR Code also brings the most significant reform of qualified pension-plan rules in Puerto Rico in recent history.

Impact on employeesOne of the most discussed changes is the increased

participant pretax contribution on so-called 401(k) or 1165(e) retirement plans. Participants were already eligible to defer up to $9,000 (in 2009) and $10,000 (in 2011) in compensation as pretax contributions to such plans under the prior PR Code. The New PR Code includes additional deferral increases in 2012, 2013 and thereafter. It also increases the catch-up contri-bution limits for participants ages 50 and above, and coordinates limits for federal employees in Puerto Rico, in accordance with U.S. tax-code limits. The new rules are summarized as follows:

YEAR PRETAX LIMIT CATCH-UP LIMIT

2010 $9,000 $1,0002011 $10,000 $1,0002012 $13,000 $1,5002013+ $15,000 $1,500

The New PR Code also eliminates the coordination of pretax contributions under qualified plans and IRAs (individual retirement accounts) in Puerto Rico. Under the prior PR Code, each dollar contributed as a pretax deferral reduced the available IRA contribu-tion for the corresponding participant by an equal amount. For participants who made pretax contribu-tions of $5,000 or more for a particular year to a tax-qualified 401(k) or 1165(e) plan in Puerto Rico, that meant they couldn’t make local IRA contributions on their own behalf under the prior PR Code. Beginning in 2011, pretax elective deferrals don’t reduce limits on local IRA contributions, which remain constant at $5,000 per person.

In terms of participant distributions, the New PR Code extended the lump-sum taxation rule to distri-butions in the case of plan terminations. There is also a new 10% tax withholding on nonlump-sum distri-butions (excluding after-tax portions) upon separation from service, and for in-service/hardship withdrawals. This is a most time-sensitive change, as its impact is applicable for distributions made during 2011.

Impact on employer-deduction limitsThe New PR Code brought some important

changes in relation to employer-deduction limits. Most welcomed is the increase in the stock-bonus and profit-sharing-plan employer deduction to 25% (from 15% under the previous PR Code) of com-pensation paid or accrued during the tax year to employees under the plan. New limits on compensation, annual benefit and annual contributions

One of the major changes brought by the New PR Code is the inclusion of rules similar to those appli-cable under the U.S. federal tax code regarding an-nual compensation limits, benefit limits for defined-benefit (D/B) plans and annual additions limits for defined-contribution (D/C) plans. These new rules begin to apply for tax years commencing in 2012.

The new annual compensation limit is $245,000. This means that in order to be qualified under the New PR Code, a pension plan may not take into account compensation in excess of this limit for purposes of determining benefits or contributions, or conducting discrimination testing for tax years beginning in 2012. In addition, there are new limits on annual benefits, the lower of (1) $195,000; or (2) 100% of the highest three consecutive-year an-nual average compensation for D/B plans, expressed as a straight life annuity with no ancillary benefits. Another change involves annual contribution limits: the lower of (1) $49,000, or (2) 100% of the annual participant compensation for D/C plans.

These changes are applicable for tax years be-ginning in 2012. Certain aggrega-tion rules apply under most of the changes.

Other changesThe New PR

Code also incorpo-rates many other changes to quali-fied pension plan administra-tion. Among oth-ers, there are: (i) a new definition of highly compensated employees for coverage and discrimination testing, (ii) new

aggregation rules for members of a controlled group, (iii) new coverage testing rules in the case of certain corporate acquisitions or dispositions, (iv) permissible partial rollovers, and (v) new penalties for noncompli-ance. Most of these changes are effective beginning in 2011.

New favorable ruling requirement from P.R. Treasury

Given the substantial statutory changes, the New PR Code also incorporates a requirement for quali-fied plan trusts to request and obtain an updated, favorable determination from the local Treasury Department as to the retirement plan’s qualified status under the New PR Code. This rule applies for tax years commencing in 2012, and guidance from Treasury is expected in terms of its implementation and interpretation.

René J. Avilés-García is a member of Ferraiuoli LLC and chair of the firm’s Employee Benefits Practice Group. You can contact him at raviles@ferraiuoli.com.

Tax Reform

From left: Laura Beléndez-Ferrero; Katherine González-Valentín, chair of the Labor & Employment Division; José Rovira-Rullán; Pedro Notario-Toll, chair of the Tax Law Division; Boris Jaskille; Jorge San Miguel, chair of the Environmental Law, Energy & Land Use Division; Eugenio Torres-Oyola, chair of the Intellectual Property Division; Fernando Rovira-Rullán, chair of the Corporate & Real Estate Division; Víctor Rodríguez-Martínez; Juan Rivera-Font, chair of the Litigation Division; Eduardo Tamargo-Motroni; Yolanda Álvarez-Cruz; and María Judith Marchand-Sánchez

Firm Profile:Number of Partners: 16

Number of Associates: 11

Number of Counsels: 1

Year Founded: 2003

Areas of Legal Practice:Intellectual Property, Corporate & Real Estate;Taxes; Labor & Employment Law; CommercialLitigation; Environmental, Energy & Land Use; Government Affairs

Representative Clients:Rocket Learning, Inc., Wireless Idea, Netxar,ARB, Inc., Popular, Inc., Government Development Bank, MMM Healthcare, Inc., Coca Cola Puerto Rico Bottlers, Puma Energy

Website: www.ferraiuoli.com

Location: Hato Rey

Ferraiuoli LLC

The new Puerto Rico Internal Revenue Codeand its impact on qualified retirement plans

The late Blas Ferraiuoli-Martínez, along with Eugenio Torres-Oyola and María Marchand-Sánchez founded Ferraiuoli LLC (FLLC) in 2003. Joined by Fernando J. Rovira-Rullán in

2004, the founding core of FLLC was set. Since then, the firm has grown exponentially to its current size of 28 attorneys with a support staff of 12. FLLC has also developed from initially being known as an intellectual-property and corporate-law boutique firm to a multiservice law firm that handles most matters relevant to businesses while continuing to earn praise for its strong intellectual-property and corporate practices.

FLLC has been ranked by the professional publica-tion Chambers Latin America as a leading law firm in Puerto Rico in intellectual property, corporate, real-estate and tax law. Moreover, five FLLC partners have been ranked as leaders in their field by the same publication. Currently, FLLC is on the list of four nomi-nees, along with three other well-established, larger law firms, to be named Puerto Rico law firm of the

year for 2011 by Chambers and Partners. This recogni-tion, earned in such a short period of time, is a tribute to FLLC’s business model.

In spite of the economic slowdown, FLLC has experienced growth. This year alone, 12 new at-torneys joined FLLC, including incoming partners Jorge L. San Miguel, Víctor Rodríguez-Martínez and Lillian Mateo, three of Puerto Rico’s preemi-nent environmental, energy and government-af-fairs attorneys. The recent addition of René Avilés adds significant depth to its high-performing tax practice; and Katherine González, who will guide a new Employee Benefits practice area, brings additional strength to an already strong Labor & Employment practice group. Additionally, Edu-ardo Tamargo joined FLLC’s Corporate Division after having worked in corporate, banking and real-estate matters as a name partner in Malley, Tamargo & Meléndez-Sauri LLC and Cotto Malley & Tamargo LLP, as well as being a partner in the Corporate Division of McConnell Valdés.

6 • Legal Eagles 2011 Legal Eagles 2011 • 7

One of the major changes brought by

the New PR Code is the inclusion of rules

similar to those ap-plicable under the

U.S. federal tax code regarding annual com-

pensation limits...

By René J. Avilés-García

From left, Ferraiuoli LLC Capital Members: Víctor Rodríguez-Martínez; Eugenio Torres-Oyola;

Fernando Rovira-Rullán; and Jorge San Miguel Ferraiuoli