COVID-19 Puerto Rico Tax Exemptions for Employer Payments and Changes to Puerto Rico Qualified Plans
The Puerto Rico Treasury Department (?Ç£Puerto Rico Treasury?Ç¥) issued Internal Revenue Circular Letter (?Ç£CC RI?Ç¥) 20-22 to offer tax exemptions for certain employer-provided payments for COVID-19. Specifically:
- CC RI 20-22 extends the provisions of CC RI 20-08, which provides income tax exemptions for ?Ç£Qualified Payments Made for Disaster Assistance?Ç¥ (?Ç£Qualified Payments?Ç¥) made by employers to employees and independent contractors, to include certain payments made as a result of the COVID-19 emergency.
- Qualified Payments must: (i) be made be during the period from February 1, 2020 to April 30, 2020; (ii) be in addition to the compensation that the employee or contractor ordinarily receives; (iii) not discriminate in favor of highly compensated employees; (iv) not be attributable to or related to the position or salary of the employee or independent contractor; and (v) be limited to maximum payments of $2,000 per month and $4,000 in total (including both Qualified Payments made as a result of the January 2020 earthquake in Puerto Rico and the COVID-19 emergency).
- Qualified Payments now include: (i) payments made to an employee or independent contractor as a consequence of the state of emergency declared in Puerto Rico as a result of the impact of COVID-19; and (ii) payments made by a private sector employer to assist its nonexempt employees, who have not worked during the COVID-19 lockdown period.
- CC RI 20-22 also extends the provisions of CC RI 20-08 to allow employers to offer their employees and independent contractors interest-free loans, that are not considered taxable income, to cover expenses related to the COVID-19 emergency.
- The loan(s) must: (i) be provided during the period from February 1, 2020 to April 30, 2020; (ii) have a loan repayment term that is no longer than 24 months; and (iii) not exceed $20,000 (including both interest-free loans made as a result of the January 2020 earthquake in Puerto Rico and the COVID-19 emergency).
The Puerto Rico Treasury issued CC RI 20-23 to offer relief to qualified plans in Puerto Rico that was offered to U.S. plans by the CARES Act. Specifically:
- CC RI 20-23 amends CC RI 20-09, which provides rules applicable to ?Ç£Special Disaster Distributions?Ç¥ (?Ç£Distributions?Ç¥) from qualified retirement plans and IRAs.
- The provisions of CC RI 20-09 continue in force, except that eligible expenses now include any expenses incurred to correct losses or damages suffered, and extraordinary and unforeseen expenses to cover basic needs, as a consequence of the emergency declared by COVID-19, including the loss of income due to the curfew declared by the Governor.
- Distributions must be made between February 20, 2020 and June 30, 2020 to Puerto Rico residents (who are residents throughout 2020), who are participants in the plan.
- Distributions receive the following tax treatment: (i) the first $10,000 is excludable from gross income and exempt from tax withholding; (ii) Distributions over $10,000 and up to $100,000 are subject to a 10% withholding and income tax rate; and (iii) total Distributions cannot exceed $100,000 (including both Distributions made as a result of the January 2020 earthquake in Puerto Rico and the COVID-19 emergency).