In recognition of his distinguished service and professional attainment in the ERISA field, on November 8, 2025, Carlos Gonzalez, president of BenefitsPuertoRico.com, was inducted into the American College of Employee Benefits Counsel, the nation’s premier institution devoted to elevating the standards and advancing the public’s understanding of the practice of employee benefits law.

For over twenty years, Carlos has assisted dozens of U.S. and international companies operating in Puerto Rico with their employee benefits and executive compensation matters on the Island.  Carlos is the author of the leading publication on employee benefits in Puerto Rico: 324-2^nd T.M., International Pension Planning – Puerto Rico and is a professor of ERISA law at the Pontifical Catholic University of Puerto Rico.  Throughout his years in the field, he has assisted the U.S. Internal Revenue Service and the Puerto Rico Treasury Department with their Puerto Rico retirement plan initiatives.

Puerto Rico benefits expert Carlos Gonzalez addresses which of the SECURE 2.0 Act’s main changes to the US retirement plan rules must be made to Puerto Rico-only qualified plans or applied to the Puerto Rico participants in dual-qualified plans, and which are optional.

SECURE 2.0 Act 2025 Puerto Rico Update (1 Oct. 2025)

This article addresses Puerto Rico’s short-term non-occupatioanl disability benefits mandate, commonly known as SINOT, and describes the process that employers should follow for complying with it. [Click on the link below for the full article]

Puerto Rico SINOT Compliance – Carlos Gonzalez – Bloomberg TMM (19 Aug. 2025)

In Revenue Procedure 2025-25, the IRS announced the 2026 indexed adjustments to the required contribution percentage to be used for determining if an individual is eligible for affordable employer-sponsored minimum essential coverage, which, in turn, impacts whether the individual is eligible for health insurance premium assistance credits under Section 36B of the United States Internal Revenue Code of 1986, as amended (the “Code”), for the purchase of healthcare coverage through the ACA Marketplace or Exchange.  And in Revenue Procedure 2025-26, the IRS announced the 2026 indexed adjustments to the penalties on applicable large employers for violations of the employer shared responsibility requirements of Code § 4980H.

These 2026 indexed adjustments do not apply to healthcare plans in operation in Puerto Rico because:

1. Puerto Rico residents cannot purchase healthcare through the ACA Marketplace or Exchange [https://www.healthcare.gov/puerto-rico/]. Therefore, they are ineligible for premium assistance credits under Code § 36B [see, Code § 7701(a)(9), which in defining the term “United States” generally used for purposes of the Code expressly excludes U.S. territories, such as Puerto Rico]; and
2. The employer shared responsibility requirements of Code § 4980H do not apply in Puerto Rico and Puerto Rico employees are disregarded in determining whether a U.S. employer is subject to such requirements and the amount of any penalties for related compliance failures [see, Treas. Reg. § 54.4980H-1(a)(24)(ii)(C) and 79 Fed. Reg. 8569 (February 12, 2014)]. In fact, employers doing business in Puerto Rico are not legally required to offer healthcare benefits to their Puerto Rio employees and there are no federal or local fines or penalties on employers that do not offer healthcare.

On the other hand, since the Public Health Service Act (“PHSA”) applies in Puerto Rico [PHSA § 2791(d)(14), which in defining the term “States” includes Puerto Rico], healthcare plans in operation in Puerto Rico are subject to limitation on cost-sharing requirements of PHSA § 2707(b), as periodically adjusted by Centers for Medicare & Medicaid Services of the U.S. Department of Health and Human Services [for the 2026 limits, see 90 Fed. Reg. 27168 (June 25, 2025)].

Accordingly, for plan year 2026, annual cost sharing on in-network essential health benefits covered by healthcare plans in operation in Puerto Rico cannot exceed $10,600 for plan participants with self-only coverage and $21,200 for plan participants with coverage other than self-only, such as family coverage.

This article describes the process that U.S. and international publicly traded companies doing business in Puerto Rico need to follow for offering their ESPPs to their Puerto Rico employees.

Operating Employee Stock Purchase Plans in Puerto Rico

Prior to July 1, 2022, publicly traded companies doing business in Puerto Rico could not for all intents and purposes offer their employee stock purchase plans (“ESPPs”) to their Puerto Rico employees because local tax laws did not exempt from income the discount on the purchase of employer stock through an ESPP.  Had Puerto Rico employees been allowed to participate in an ESPP, the discount on the purchase of employer stock would have been part of their taxable wages, which essentially would have defeated the purpose of offering the ESPP to them.

Fortunately, effective as of July 1, 2022, Puerto Rico Act No. 52-2022 [https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/2020/0052-2022.pdf] amended the Puerto Rico Internal Revenue Code of 2011 (the “PRIRC”) [https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/Códigos/1-2011/1-2011.pdf] to, among other things, allow for the operation of ESPPs in Puerto Rico.  Specifically, PRIRC § 1040.08(b)(4) now provides that the discount on the purchase of employer stock through an ESPP established and operated in accordance with Section 423 of the United States Internal Revenue Code of 1986, as amended (the “Code”), is exempt from Puerto Rico income taxation at the time of purchase.  Therefore, through their U.S.-based ESPPs, publicly traded companies can now sell their stock to their Puerto Rico employees at a discount of up to 15% in accordance with Code 423(b)(6), without resulting in immediate income taxation to the Puerto Rico employees.  Upon the subsequent sale or disposition of the employer stock, however, the Puerto Rico employees will realize a short-term or long-term capital gain or loss, depending on the length of the holding period.

Since offering an already existing ESPP to an additional group of employees does not represent many costs or administrative complications to an employer, some of the publicly traded companies doing business in Puerto Rico are now allowing their Puerto Rico employees to participate in their ESPPs.  This article summarizes the process that these companies should follow for including their Puerto Rico employees as participants in their U.S.-based ESPPs.

Operational Requirements

Except for registering or “qualifying” their ESPPs with the Puerto Rico Treasury Department (commonly known by its Spanish name as “Hacienda”, https://hacienda.pr.gov/) and complying with certain local employment law restrictions on the use of employee payroll deductions for purchasing employer stock, which are described below, publicly traded companies can safely and validly operate their ESPPs in Puerto Rico in accordance with the operational requirements of Code § 423.  Other than amending the official plan document to allow the Puerto Rico employees to participate, no special or different Puerto Rico-related terms, conditions, or testing requirements need to be adopted or complied with.  The same plan documents, employee communication materials, and recordkeeping procedures that are used in the U.S. may be used in Puerto Rico.

Securities Registration Exemption

Pursuant to Article 402(a)(8) of the Puerto Rico Uniform Securities Act of 1963, as amended [https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/60-1963.pdf], insofar as the employer stock sold through an ESPP is already listed in an established U.S. stock exchange (e.g., NYSE or NASDAQ), neither the employer stock nor ESPP itself has to be registered with the local securities regulator, the Office of the Puerto Rico Commissioner of Financial Institutions (commonly known by its Spanish acronym as “OCIF”, https://www.ocif.pr.gov/).

Hacienda Filing Requirements

Pursuant to Article 1046-4(a) of Hacienda Regulation No. 6246 of December 22, 2000 [https://hacienda.pr.gov/sites/default/files/6246.pdf], ESPPs in operation in Puerto Rico need to be filed with Hacienda following the procedures for requesting administrative determination letters set forth in Hacienda Circular Letter of Tax Policy No. 16-09 [https://hacienda.pr.gov/publicaciones/circular-letter-tax-policy-no-16-09-cl-tp-16-09].  Currently, the procedure for filing ESPPs with Hacienda is different from, and admittedly more elaborate than, the procedure for having retirement plans qualified by Hacienda, which is included in Hacienda Circular Letter of Tax Policy No. 16-08 [https://hacienda.pr.gov/publicaciones/carta-circular-de-politica-contributiva-num-16-08].

Ideally, the ESPP should be filed with Hacienda by the first anniversary of the date on which the ESPP began covering Puerto Rico participants.  That is, it is not necessary for the Hacienda filing to be completed before Puerto Rico employees begin participating in the ESPP.

The filing requires payment of the administrative fees listed in Article 6(a)(17)(vii) of Hacienda Regulation No. 9115 of October 8, 2019 [https://hacienda.pr.gov/sites/default/files/publicaciones/2019/10/9115.pdf], and such payment needs to be completed electronically through Hacienda’s online portal, Colecturía Virtual [https://colecturiavirtual.hacienda.pr.gov/portal].  It usually takes about nine months to a year for Hacienda to review the filing and issue the corresponding administrative determination letter approving the local tax-qualification of the ESPP.  Provided that the ESPP is operated in accordance with Code § 423, the employer may safely operate its ESPP in Puerto Rico while Hacienda completes its administrative review and approval process.

Employment Law Requirements

Pursuant to Section 5(n) of Puerto Rico Act No. 17-1931, as amended [https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/Sueldos/17-1931.pdf], employers can use employee payroll deductions to finance the purchase of employer stock through an ESPP, provided that the deductions are completely voluntary (i.e., the Puerto Rico employees have affirmatively elected to participate in the ESPP) and the administrative forms used by the employer or its designee for obtaining the Puerto Rico employees’ written authorization include the following legend (in capital letters):

“You are not required to purchase any shares of employer stock.  Your decision in this regard is completely voluntary and if you decide not to purchase employer stock, your employer cannot take any adverse action against you.  If you consider that you are being forced to purchase shares of employer stock or that your employer has taken adverse action against you for not doing so, you may file a claim with the legal division of the Puerto Rico Department of Labor and Human Services.  If the Department finds that your employer violated these rules, it will require your employer to refund you the amount withheld from your payroll plus an amount equal to five times the amount withheld.”

Tax Reporting & Withholding Requirements

Thus far, Hacienda has allowed publicly traded companies to use, in regard to the Puerto Rico participants in their ESPPs, the same U.S. tax forms used with U.S. participants.  That is, the employer or its designee should report (1) the purchase of employer stock by Puerto Rico participants by filing IRS Form 3922 [https://www.irs.gov/pub/irs-pdf/f3922.pdf] with the IRS – not with Hacienda – and providing a copy thereof to the Puerto Rico participants, and (2) the subsequent sale of employer stock by the Puerto Rico participants by filing IRS Form 1099-B [https://www.irs.gov/pub/irs-pdf/f1099b.pdf] with the IRS – not with Hacienda – and providing a copy thereof to the Puerto Rico participants.

Puerto Rico taxes do not need to be withheld and deposited with Hacienda on the proceeds from the sale of employer stock.

Individual Taxation

Provided that the discount on the purchase of employer stock does not exceed the maximum allowed under Code § 423(b)(6), Puerto Rico participants in an ESPP do not recognize any taxable income at the time of purchase [PRIRC § 1040.08(a)(1)].  Upon the subsequent sale of employer stock, they will realize a capital gain on the excess of the sales proceeds over the purchase price initially paid for the stock, or a capital loss if the sales proceeds are lower than the purchase price [PRIRC § 1034.03(a)].  If the participant’s holding period in the stock (i.e., the period between the initial purchase date and the subsequent sales date) exceeds twelve months, the resulting gain or loss is considered a long-term capital gain or loss, subject to a maximum income tax rate of 15% [PRIRC §§ 1034.01(a)(4) and 1023.02(a)].  But if the holding period is less than twelve months, the resulting gain or loss is considered a short-term capital gain or loss, subject to the ordinary income tax rates (i.e., between 0% and 33%, depending on the participant’s taxable income for the year of sale) [PRIRC §§ 1034.01(a)(2) and 1021.01(a)(3)].  The PRIRC does not have a local equivalent to the ordinary income recapture rule of Code § 423(c).  Therefore, the initial discount upon the purchase of the employer stock is subject to the same long-term or short-term capital gain or loss rules described above.

The Puerto Rico participants are responsible for reporting their taxable income resulting from the sale of employer stock, and paying any resulting local income taxes, in their Puerto Rico individual income tax returns, Hacienda Form 482 [https://hacienda.pr.gov/sites/default/files/individuos_2024_rev._20_may_24_9-30-24_informativo.pdf].

Corporate Taxation

The employer cannot claim a compensation deduction or any other credit or deduction on its Puerto Rico income tax return on account of operating its ESPP in Puerto Rico [PRIRC § 1040.08(a)(2)].

Puerto Rico benefits and compensation attorney Carlos Gonzalez shares his practical experience with, and recommendations on, the evaluation of the cybersecurity measures of insurance companies servicing healthcare and welfare benefit plans operating in Puerto Rico. Read the full article here: Cybersecurity Evaluation of P.R. Health and Welfare Plans – Bloomberg TMM (30 Jan. 2025)

On January 22, 2025, the Puerto Rico Treasury Department (commonly known by its Spanish name as “Hacienda”) issued Circular Letter of Internal Revenue No. 25-01 [https://hacienda.pr.gov/publicaciones/carta-circular-de-rentas-internas-num-25-01-cc-ri-25-01], establishing the annual contributions and compensation limits applicable for 2025 to 401(k) plans in operation in Puerto Rico.  Unfortunately, Hacienda did not increase vis-à-vis 2024, the maximum amounts that Puerto Rico participants can contribute to their 401(k) plan accounts through pre-tax, catch-up, or after-tax contributions.  And, because the Puerto Rico Internal Revenue Code of 2011 (“PRIRC”) does not provide for Roth contributions, Puerto Rico participants remain ineligible to make Roth contributions to their 401(k) plan accounts.

Basically, the 2025 limits are:

• Pre-tax contributions to 401(k) plans qualified only under PRIRC § 1081.01(a), 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 § 1081.01(a), commonly known as “dual qualified plans”, $20,000. This lower limit only applies to those plan participants who are Puerto Rico residents, which generally means participants whose wages are reported to Hacienda on a local Form W-2 [https://hacienda.pr.gov/sites/default/files/documentos/comprobante_de_retencion_2024_rev._05.24_informativo.pdf], not to the IRS on a U.S. Form W-2.
• 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 § 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.
• Annual additions to a participant’s 401(k) plan account (i.e., the local equivalent to Code Sec. 415(c)(1)), $70,000. 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 § 401(a)(17)), $350,000. 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 (e., the local equivalent to Code § 414(q)(1)(B)), $160,000. In accordance with PRIRC § 1081.01(a)(3)(E), dual qualified 401(k) plans that pass the minimum coverage test of Code § 410(b) and the actual deferral percentage (ADP) test of Code § 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.

This article answers the most common questions currently being asked by H.R. and employee benefits officials of U.S. companies with operations in Puerto Rico as to whether employer matching contributions can be made on account of the qualified student loan payments (“QSLPs”) by Puerto Rico participants in either U.S. 401(k) plans that are also qualified in Puerto Rico (commonly known as “dual-qualified plans”) or 401(k) plans that are only qualified in Puerto Rico (commonly known as “P.R.-only qualified plans”).

QSLP Matches on Puerto Rico Plans – 65 TMM (20 Sept. 2024)

Puerto Rico benefits & compensation expert Carlos Gonzalez shares his practical experience with the evaluation of the cybersecurity measures of local financial institutions servicing retirement plans in operation in Puerto Rico.

Cybersecurity of Puerto Rico Retirement Plans – 65 TMM (31 July 2024)

Employers considering reductions in workforce in Puerto Rico should be aware that the rules on the taxation of severance pay in the United States and Puerto Rico are different.

The U.S. rule is straightforward: severance pay is always taxed as wages.  Therefore, as the Internal Revenue Service instructs in page 3 of Publication 4128, Tax Impact of Job Loss (https://www.irs.gov/pub/irs-pdf/p4128.pdf) and page 4 of Publication 525, Taxable and Nontaxable Income (https://www.irs.gov/pub/irs-pdf/p525.pdf), it is included in an employee’s Form W-2 and is subject to the withholding of both federal income tax and Federal Insurance Contributions Act (FICA)/Social Security taxes on wages.  In Puerto Rico, however, severance pay is largely, and often totally, exempt from the withholding of local income tax, but it is still subject to the withholding of FICA taxes.

Puerto Rico’s Tax Rule

Pursuant to Sections 1031.01(b)(15) and 1062.01(a)(1)(G) of the Puerto Rico Internal Revenue Code of 2011 (https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/2-ingles/1-2011.pdf),   severance pay that a discharged employee receives by reason of his or her dismissal, regardless of whether the dismissal was with just cause, is exempt from the withholding and payment of local income tax up to a maximum amount equal to the compensation the employee would have been entitled to receive under the local unjust dismissal pay law, commonly known as “Act 80” (https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/Trabajo/80-1976/80-1976.pdf),  had the dismissal been without just cause.  Severance pay in excess of the Act 80 unjust dismissal amount is fully taxable as wages.

As in the United States, severance payments made to Puerto Rico employees are always subject to the withholding and payment of FICA taxes.

Illustration: In connection with a legally compliant dismissal, a Puerto Rico employee receives a severance payment of $25,000.  Assuming that the dismissal was unjust for Act 80 purposes, the employee would have been entitled to an Act 80 amount of $15,000. Therefore, the first $15,000 is exempt from the withholding and payment of Puerto Rico income tax, whereas the remaining $10,000 is taxed as wages.  The entire $25,000 is subject to FICA taxes.

Severance Pay

Severance pay includes any payments that an employer makes to a current or former employee, either voluntarily or in compliance with a court order or settlement agreement, as a direct consequence of the employee’s dismissal or termination of employment, but excluding:

• benefits and compensation for services rendered, such as wages, performance bonuses, and sales commissions;
• liquidation of vacation and sick pay accrued up to the last day of employment;
• pensions and other retirement benefits; and
• distribution of deferred compensation.

Severance pay may be paid in a lump sum, installments, or periodic payments, pursuant to an Employee Retirement Income Security Act-covered severance plan, a payroll program or practice, or an employment contract.

Act 80 Amount

Again, only the portion of severance pay that does not exceed the unjust dismissal amount otherwise payable under Act 80 is exempt from local income taxation.  Interestingly, the “Act 80 amount” varies depending on the employee’s hire date with the employer, as follows:

Employees hired on or before January 26, 2017:

1. For employees who at termination of employment have less than five years of service with the employer, the Act 80 amount equals two months’ salary plus one week’s salary per each full year of service.
2. For employees who at termination of employment have between 5 and 15 years of service with the employer, the Act 80 amount equals 3 months’ salary plus 2 weeks ‘salary per each full year of service.
3. For employees who at termination of employment have over 15 years of service with the employer, the Act 80 amount equals 6 months’ salary plus 3 weeks’ salary per each full year of service. For these employees, “salary” means the highest salary for wages within the three years immediately preceding the date of termination.

For employees hired on or after January 27, 2017, the Act 80 amount equals three months’ salary plus two weeks’ salary per each full year of service with the employer.  For these employees, “salary” means the highest salary or wages during any 30-day period within the immediately preceding year, and their Act 80 amount is subject to a cap equivalent to 9 months’ salary.

Puerto Rico Tax Reporting

The portion of severance pay on or below the Act 80 amount is reported as tax-exempt salary in Box 16 of the employee’s local Form W-2, officially named Form 499-2/W-2PR, Withholding Statement (https://hacienda.pr.gov/sites/default/files/documentos/comprobante_de_retencion_2023_rev._06.23_informativo.pdf) under the compensation code “I,” Compensation or indemnification paid to an employee due to dismissal under Section 1031.01(b)(15) of the Code.  The taxable portion of severance pay is included as part of the employee’s regular wages in Box 7 of the local Form W-2, Wages.

Local Form W-2 must be filed electronically with the Puerto Rico Department of the Treasury (commonly known as “Hacienda”) through its online portal, Sistema Unificado de Rentas Internas or SURI (https://suri.hacienda.pr.gov/_/), by January 31 of the following year.

Over-withholding Corrections

If an employer inadvertently withholds Puerto Rico income taxes on the portion of severance pay on or below the Act 80 amount, and such taxes cannot be returned to the employee because they have already been deposited with Hacienda, the proper correction procedure is to report the tax-exempt amount in Box 16 of Form 499-2/W-2PR, as described above, and the local taxes withheld in Box 13 of the employee’s Form499-2/W-2PR.  If the local individual income tax return for the year in which the severance payment has been completed, the employee will be able to request a refund of the amount over-withheld.