Compliance January 2, 2018

Benefit Limitations for Plans Covering Puerto Rican Residents Announced

Retirement plan sponsors with participants in U.S. territories should familiarize themselves with any differences in law.

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On December 15, 2017, the Puerto Rico Treasury Department issued Circular Letter of Tax Policy 17-02 formally announcing the key pension limits for 2018, as required by the Puerto Rico Internal Revenue Code of 2011. 

According to a Groom Law Group Benefits Brief, for plans qualified only in Puerto Rico (PR-only plans), the limits on elective deferrals, catch-up and after-tax contributions, and the highly compensated employee threshold all remain unchanged for 2018, while the limits on annual benefits, annual contributions, and plan compensation all increased for 2018. These limits are different than limits for U.S.-qualified or dual-qualified plans. For example, the 2018 limit on elective deferrals to PR-only plans is $15,000, rather than the $18,500 limit for U.S.-qualified and dual-qualified plans. The limit for catch-up contributions for both PR-only and dual-qualified plans is $1,500.

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Juan Luis Alonso, of counsel with Groom Law Group Chartered, in Washington, D.C., whose practice is almost exclusively related to Puerto Rico plans, explains that Puerto Rico has its own Treasury Department, and a separate Internal Revenue Code provides rules and regulations for qualified plans in Puerto Rico. “The Puerto Rico Internal Revenue Code is based on the U.S. Code, but hasn’t kept pace,” he tells PLANSPONSOR. “A couple of amendments brought the Code closer to the U.S. Code, but there are still some differences.”

Retirement plans that cover Puerto Rican residents must file with the Puerto Rico Treasury Department for qualification. According to Alonso, this includes PR-only plans and dual-qualified plans. Unlike the U.S. Treasury, the Puerto Rico Treasury Department still requires determination letters for new plans and for plans updated by amendments. In June 2016, the U.S. Internal Revenue Service eliminated the five-year remedial amendment cycles for individually designed plans and made other changes to its determination letter program.

Alonso explains that different limits and rules for plans qualified in Puerto Rico do cause some operational issues for plan sponsors. Puerto Rico plans are subject to provisions of Title I of the Employee Retirement Income Security Act (ERISA) in the same way as U.S. qualified plans, but in case of defined benefit (DB) plans, some Puerto Rico plans have received a letter allowing them not to be subject to Title IV of ERISA. “Not only does this mean they do not have to pay premiums to the PBGC [Pension Benefit Guaranty Corporation], but they may also request a refund of any premiums paid in the prior six years,” he says. Another difference that can be an issue for dual-qualified plans is that in Puerto Rico, the average deferral percentage (ADP) test is required, but there is no average contribution percentage (ACP) test requirement.

According to Alonso, as the Puerto Rico Code gets closer to the U.S. Code, it gets easier for dual-qualified plans to comply. Still, some plan sponsors choose to maintain separate plans for U.S. residents and Puerto Rican residents.

As for other U.S. territories, Alonso says the U.S. Virgin Islands have a mirror Code of the U.S. Code, so benefit limitations and ERISA fully apply, but he is not as familiar with the laws in other U.S. territories.

Retirement plan sponsors with participants in U.S. territories should familiarize themselves with any differences in law.
Investing December 29, 2017

Steady Fixed-Income Outlook for 2018

With a new Fed chair and expectations for rising rates, 2018 will be a year to focus on fixed income portfolios.

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Writing about his 2018 outlook for the U.S. and global fixed-income markets, Brett Wander, chief investment officer, fixed income, Charles Schwab Investment Management, foresees a slow and steady year. This is particularly true, he says, when it comes to the likely approach that will be taken by the incoming Federal Reserve Chair Jerome Powell. 

“Jerome Powell will be the new Fed chair and likely do exactly what [former Fed Chair] Janet Yellen has been doing for years—move rates up very cautiously,” Wander says. “The last thing Powell wants is to spook the stock market by moving too quickly. And, with the continued lack of inflation, he’ll face more pressure to keep rates low than to normalize too fast. Look for two or three rate hikes in 2018, but don’t expect four.”

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Looking back on a year of interest rate movements, Wander observes that today the yield spread between 2- and 10-year Treasuries is about 0.50%, “less than half of where we started 2017.” Wander says to “expect more flattening in 2018, maybe even yield curve inversion.”

“In the old days, an inverted curve foreshadowed slowing growth and a possible recession,” Wander writes. “But in the current environment, this model is obsolete. Inflation is tame, so longer-term yields don’t have to rise. Meanwhile, the Fed could easily raise rates 0.50% to 0.75%, making a flat or slightly inverted yield curve the new normal.”

Attempting to address interest rate risk is always a challenge for retirement investors, whether for individuals utilizing 401(k) accounts or for the largest pensions, but one approach commonly advocated for is the bond ladder. Experts argue bond ladders can work in a rising rate environment and across a variety of unpredictable macroeconomic scenarios—allowing investors to continually readjust their fixed-income exposure as the situation shifts. 

According to Wander, 2018 will be a year to focus on fixed income portfolios.

“Another 20%-plus return for U.S. stocks is highly improbable in 2018,” he says. “Tax reform is already priced in and another significant injection of market euphoria seems unlikely. Instead, we’ll likely see continued turbulence on the Trump-front, and a great deal of uncertainty in the geopolitical realm. This could be bad for stocks but could be good for bonds.”

On the equities side of the equation, Omar Aguilar, chief investment officer, equities and multi-asset strategies, argues that the “second-longest bull market ever” still has room to run, with synchronized global growth providing a solid foundation for equities.

“The lack of inflation globally supports the Fed’s plans to raise rates gradually, while other central banks seem likely to maintain accommodative policies for most of 2018,” he concludes.

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