Puerto Rico Treasury Department issued Internal Revenue Circular Letter No. 20-22 and No. 20-23 establishing guidelines for qualified relief payments and special distributions made from a Retirement Plan or an IRA to cover qualified expenses due to the State of Emergency and curfew declared by the Governor of Puerto Rico as a result of COVID-19 pandemic.

In summary, Internal Revenue Circular Letter No. 20-22 (“CL 20-22”) and No. 20-23 (“CL 20-23”) extend the provisions of Internal Revenue Circular Letter No. 20-08 (“CL 20-08”) and No. 20-09 (“CL 20-09”) to qualified relief payments and special distributions made to cover qualified expenses due to the State of Emergency.[1]  Below is a general summary of the guidelines provided in CL 20-22 CL 20-23.

CL 20-22: Qualified Relief Payments

Under CL 20-22, payments made to employees or independent contractors due to the State of Emergency will be deemed Qualified Relief Payments, as established in CC RI 20-08 (“Qualified Relief Payments”). Qualified Relief Payments also include relief payments made by private sector employers to non-exempt employees who have not worked during the lockdown period.   In order for the payment to be considered a Qualified Relief Payment, it must meet the requirements established in CL 20-08, including, but not limited to, that it must be made  from February 1, 2020 until April 30, 2020 (the “Eligible Period“) and that the total amount of all Qualified Relief Payments made during the Eligible Period must not exceed $2,000 per month and $4,000 during the Eligible Period.

In addition, employers will not have to recognize income on interest free loans offered by an employer to employees or independent contractors during the Eligible Period to cover expenses described in Section 1031.1(b)(16)(A)(i) and (ii)  of the Puerto Rico Internal Revenue Code of 2011, as amended (the “Code”), as long as the total amount of the loan or loans do not exceed $20,000 and must be repaid within 24 months.[2]

CL 20-23: Special Distributions

Under CL 20-23, (i) expenses incurred to cover losses or damages and (ii) extraordinary and unforeseeable expenses to cover basic necessities as a result of the State of Emergency, including loss of income resulting from the lockdown declared by the Governor, will be considered Qualified Expenses for purposes of Special Distributions established in CL 20-09 (“Special Distributions”). As provided under CL 20-09 the first $10,000 of the Special Distribution would be exempt from Puerto Rico income tax and withholding. The Special Distribution must also meet the requirements of CL 20-09, which include, among others, the rules on the tax and withholding treatment of the Special Distribution, the bona fide Puerto Rico residency requirement and the participant sworn statement[3] requirement. Note that the plan document would need to allow for in-service distributions in the case of emergency declaration by the government.

Note that for the purposes of the distribution limits established in Sections 1081.01(b)(1)(D) and 1081.02(d)(1)(I) of the Code, the earthquakes that occurred in January 2020 and the health emergency caused by COVID-19 are deemed a single event. Said distributions will be subject to the limits established in CL 20-09 regardless of whether they are used to cover Qualified Expenses caused by either the earthquakes or COVID-19 or both.

For any questions or inquiries regarding this topic do not hesitate to contact us at info@oneillborges.com or your primary contact attorney at O’Neill & Borges.  Please refer to www.oneillborges.com.

[1]CL 20-08 and CL 20-09 established guidelines for qualified relief payments and distributions from a Retirement Plan or an IRA to cover qualified expenses due to the earthquakes that affected Puerto Rico.

[2] Based on prior circular letters issued by the PR Treasury Department, we understand that employees will not have to recognize any interest income that they would have otherwise been required to pay on the loans.

[3] As of this date, PR Treasury has yet to clarify how to comply with the participant sworn statement requirement during the lockdown period declared by the Government.