October 7, 2022
Puerto Rico's Treasury Department issues guidance on special disaster distributions from retirement plans and IRA accounts due to Hurricane Fiona
The Puerto Rico Treasury Department has issued guidance (Circular Letter (CL) 22-13) on special disaster distributions from retirement plans and IRA accounts because of the state emergency declared by the Governor of Puerto Rico due to Hurricane Fiona.
Payments or distributions in cash from a retirement plan or IRA requested by the eligible individual from October 6, 2022 to December 31, 2022, to cover eligible expenses will qualify as special disaster distributions. To receive a special disaster distribution, the eligible individual must submit to the employer that maintains the retirement plan or the service provider that administers the plan (for IRAs, the financial institution or insurance carrier that maintains the account) a certification signed under penalties of perjury that includes the information detailed in CL 22-13. An eligible individual is an individual who is considered a resident of Puerto Rico during calendar year 2022. Eligible expenses are expenses an individual incurs to cover losses, damages and extraordinary and unforeseen expenses for basic necessities resulting from a disaster.
Special disaster distributions will be subject to tax under Sections 1081.01(b)(1)(D) and 1081.02(d)(1)(J) of the Puerto Rico Internal Revenue Code of 2011 (PR Code). If the distributions exceed $10,000, they are subject to 10% withholding at source to the extent the total amount of the distributions does not exceed $100,000. If the withholding at source is not done at the time of the distribution, the distributed amount will be subject to the regular income tax rates established in the PR Code. The employer, administrator or service provider of the trust or annuity contract is only required to withhold on the amount that has not been previously subject to tax and must remit the withholding tax to the PRTD no later than the 15th day of the month following the date on which the distribution is made.
The administrator of the retirement plan should report the amount distributed and withheld at source to the individual and the PRTD on Form 480.7C, Informative Declaration — Retirement Plans and Annuities, for tax year 2022. The fiduciary of the IRA should report the amount distributed and withheld at source on Form 480.7, Informative Declaration — Individual Retirement Account, for tax year 2022. The forms should be filed electronically on or before February 28, 2023, and should include any other distributions not considered special disaster distributions.
Employers that maintain retirement plans are not required to adopt the provisions of CL 22-13 or Section 1081.01(b)(1)(D) of the PR Code. They may amend their plans to adopt some of the provisions and establish a limit for special disaster distributions. If a plan adopts the provisions of Section 1081.01(b)(1)(D) of the PR Code, those amendments should be completed no later than December 31, 2022.
Individuals should take into account the special rules and procedures of CL 22-13 for requesting special disaster distributions from retirement plans or IRAs. For example, individuals who are interested in the distributions should request the distributions and the distributions should be paid during the eligible period, even if the eligible expenses may be incurred after that period; otherwise the distributions will not be eligible for the income exclusion and special 10% tax rate.
CL 22-13 was issued together with a model application for requesting the distributions, which can be used as reference. Employers, plan administrators and fiduciaries of IRA distributions are considered withholding agents and must withhold at source on the distributions. The failure to comply with the withholding requirement could cause the distributions to be taxed at regular income tax rates.