2024 Limits on Contributions to 401(k) Plans Qualified in Puerto Rico

On January 30, 2024, the Puerto Rico Department of the Treasury (commonly known by its Spanish name as “Hacienda”) issued Circular Letter of Internal Revenue No. 24-01, establishing the 2024 annual limits on, among others, contributions by Puerto Rico participants to 401(k) plans in operation in Puerto Rico.  Basically, the 2024 limits are:

• Pre-tax contributions to 401(k) plans qualified only under Section 1081.01(a) of the Puerto Rico Internal Revenue Code of 2011 (“PRIRC”), commonly known as “P.R.-only qualified plans”, $15,000.
• Pre-tax contributions to 401(k) plans qualified under Section 401(a) of the United States Internal Revenue Code of 1986 (“Code”) and PRIRC Sec. 1081.01(a), commonly known as “dual qualified plans”, $20,000.
• Catch-up contributions to 401(k) plans, both P.R.-only qualified and dual qualified, $1,500 (or $7,500 for Puerto Rico participants in the U.S. government’s Thrift Savings Plan).  The catch-up rules of Code Sec. 414(v) may safely be used for determining which participants are eligible for catch-up contributions.
• After-tax contributions to 401(k) plans, both P.R.-only qualified and dual qualified, 10% of the participant’s aggregate covered compensation for all years of plan participation.  For ease of administration, most 401(k) plans simply provide for an after-tax limit of 10% of the participant’s covered compensation for the current year.
• Roth contributions to 401(k) plans, both P.R.-only qualified and dual qualified, not allowed, because currently the PRIRC does not provide for Roth contributions.
• Annual additions to a participant’s 401(k) plan account (i.e., the local equivalent to Code Sec. 415(c)(1)), $69,000.  The relevant U.S. rules may safely be used for determining compliance with the local rules.
• Annual covered compensation for contribution allocations and nondiscrimination testing (i.e., the local equivalent to Code Sec. 401(a)(17)), $345,000.  The relevant U.S. rules may safely be used for determining compliance with the local rules.
• Compensation for highly compensated employee (HCE) classification for nondiscrimination testing (i.e., the local equivalent to Code Sec. 414(q)(1)(B)), $155,000.  In accordance with PRIRC Sec. 1081.01(a)(3)(E), dual qualified 401(k) plans that pass the minimum coverage test of Code Sec. 410(b) and the actual deferral percentage (ADP) test of Code Sec. 401(k)(3) automatically pass the equivalent local tests, thus no separate Puerto Rico-only testing is needed.  While this may require some Hacienda filings, this “nondiscrimination reciprocity rule” also applies to safe harbor 401(k) plans.

In the case of dual qualified 401(k) plans, Hacienda’s limits only apply to those participants who, pursuant to PRIRC Sec. 1010.01(a)(3o), are residents of Puerto Rico.  Basically, this means participants whose wages are reported using a local Form W-2 (officially known as Hacienda Form 499R-2/W-2PR) because that allows for the participant’s pre-tax contributions to be matched with his/her wages, which, in turn, allows the participant to receive the corresponding income tax benefit.  U.S. participants, on the other hand, remain subject to the regular annual limits set forth by the IRS in Notice 2023-75 (e.g., $23,000 for pre-tax contributions and $7,500 for catch-up contributions).

Unless the official plan document happens to incorporate the underlying dollar limits, rather than references to the relevant PRIRC sections, implementing the 2024 limits does not require a formal plan amendment.  And any such amendment does not have to be filed or registered with Hacienda.  In any event, plan sponsors should contact their recordkeepers or TPAs to confirm that, effective January 1, 2024, their 401(k) plans in operation in Puerto Rico are administered in accordance with Hacienda’s 2024 limits.

Conflict with SECURE 2.0 Act?  Sponsors and administrators of dual qualified 401(k) plans need to be aware that, at least on paper, the local limits could be at odds with some of the U.S. retirement plan qualification rules recently enacted by SECURE 2.0 Act (“Act”).  For example, while Hacienda requires that catch-up contributions by Puerto Rico participants in dual qualified 401(k) plans be limited to $1,500, Act Sec. 109 allows participants ages 60-63 to contribute up to $10,000 on a catch-up basis.  And, while the PRIRC does not provide for Roth contributions, Act Sec. 603 requires that catch-up contributions by certain highly compensated participants be made through Roth contributions.

Since dual qualified 401(k) plans are, first and foremost, 401(k) plans qualified under Code Sec. 401(a), which the Act effectively amended, the question then becomes whether the Act’s new rules override the PRIRC and Hacienda’s administrative guidance, thus requiring that Puerto Rico participants in dual qualified 401(k) plans be subject to exactly the same rules that apply to U.S. participants.  Or is it permissible (i.e., without jeopardizing the plan’s U.S. qualified status) to set up a slightly different set of rules solely for Puerto Rico participants?  Treasury and IRS officials are currently evaluating this matter, so, hopefully, formal guidance on the subject will be issued in the not-so-distant future.