Puerto Rico Pension Codes Misapplied on Form 5500

As part of its Hacienda Project, the IRS’ Employee Plans Compliance Unit examined whether plan sponsors were properly classifying plans that cover employees who are Puerto Rico residents.

Form 5500 lists two Puerto Rico-related pension feature codes, Code 3C and Code 3J. The first code signifies that a plan is not intended to be qualified under Internal Revenue Code (IRC) Sections 401, 403 or 408. The second code signifies that a plan based in the United States covers Puerto Rico residents and is qualified under both IRC Section 401 and Puerto Rico Code Section 1165, or is a dual-qualified plan.

The IRS found plan sponsors queried for the project misunderstood these pension feature codes, with sponsors:

• Intending their plans to qualify only under the Puerto Rico Code because they were Puerto Rico employers covering only employees in Puerto Rico;
• Incorrectly selecting Code 3C instead of Code 2C. In this case, the plan sponsors were U.S. employers who did not have any employees in Puerto Rico and never sponsored a plan in Puerto Rico, meaning instead to choose 2C because they had a money purchase plan; or
• Incorrectly provided a Puerto Rico address.

The IRS notes that sponsors of plans covering employees in Puerto Rico must receive approval from the Puerto Rico tax authority, the Hacienda. Plan sponsors can elect to have their plans qualified under only the Puerto Rico Code (and use pension feature code 3C) or under the IRC and Puerto Rico Code (and use pension feature code 3J).

The IRS recommends the relevant plan sponsors take time to review their most recent Form 5500 filing to ensure that the Puerto Rico-related items are properly completed. If any errors are found, plan sponsors need to amend and resubmit their Form 5500 filing.

For questions about this topic, email the IRS at epcu@irs.gov with “Hacienda Project” in the subject line.

More information about this topic can be found here.