Provision

PR Code

2006 Code

Compliance with Employee Retirement Income Security Act (“ERISA” )

As a requirement for qualification, a plan must comply with ERISA.

As a requirement for qualification, a plan must comply with ERISA. In addition, the 2006 Code provides that ERISA prevails over the 2006 Code in case of conflict between the laws. Generally, will not require changes to plan documents.

Provision

PR Code

2006 Code

Requirement of a Puerto Rico Trust or Puerto Rico Trustee

Trusts funding Puerto Rico qualified plans must be established in Puerto Rico (“PR Trust”) and the trustee must be a resident of Puerto Rico (“PR Trustee”). Compliance with such requirements may be waived by Secretary of the Treasury for: (1) trusts established in the United States (“US Trust”) that appoint a financial institution regulated by the Puerto Rico Commissioner of Financial Institutions as Paying Agent in Puerto Rico; or (2) US Trust with a PR Trustee acting as the Paying Agent for the trust. Applicable for plans established on or after September 22, 2004. Plans established before said date must be in compliance with the requirements after September 22, 2007.

Trusts funding Puerto Rico qualified plans must have a trustee who is a resident of Puerto Rico (“PR Trustee”) acting as the Paying Agent for the trust. For plans funded through a US Trust, change would require: (1) amending the US Trust agreements in order to include a co-trustee arrangement; and (2) the execution of Deed of Co-trustee following provisions of Puerto Rico Notarial Law.

Taxation of lump-sum distributions

20% withholding on lump-sum distributions. Taxed at long-term capital gains tax rates (currently 12.5%).

20% withholding on lump-sum distributions remains unchanged. Taxed at ordinary tax rates. Benefit of special tax rate is lost. Need to confirm applicability of $15,000 annual exclusion. Discussion of tax consequences in summary plan description (“SPD”) may be required to be modified.

Provision

PR Code

2006 Code

Taxation of distributions other than lump-sum distributions

No withholding on distribution. Taxed at ordinary tax rates after annual exclusion of $8,000 per pension ($12,000 per pension for participants and beneficiaries age 60 or older).

No withholding on distribution. Taxed at ordinary tax rates after annual exclusion of $15,000 for single taxpayers and married taxpayers who file separately ($30,000 for married taxpayers filing jointly). Phase-out of $15,000 / $30,000 annual exclusion for taxpayers with adjusted gross income (“AGI”), including pension income, in excess of $15,000 and $30,000, respectively. Exclusion is completely phased-out when AGI reaches $25,000 (single or married filing separately) or $50,000 (married filing jointly). Discussion of tax consequences of plan distribution in SPD may be required to be modified.

Limitation on Pre-tax Contributions

10% of compensation, not to exceed $8,000. The $8,000 annual limitation is reduced by contributions made by the participant to IRA.

10% of compensation, not to exceed $10,000. Both the 10% and the $10,000 annual limitation are reduced by contributions made by the participant to IRA and ECAs. Depending on the current language used for the limitation in the plan document, plans may be required to be amended to comply with the new limitation. Even though annual limitation is increased to $10,000, the aggregate annual exclusion from gross income may actually be reduced for certain taxpayers (e.g., deduction of ECAs is currently not limited).

Provision

PR Code

2006 Code

Definition of Highly Compensated Employees (“HCE”)

HCE is any participant who, determined on the basis of compensation for each plan year, has greater compensations than two-thirds of all other participants. (i.e., Old U.S. Code 1/3 - 2/3 rule.)

HCE is any employee who: (1) was a five percent owner at any time during the current year or the preceding year; or (2) for the preceding year, received compensation from the employer in excess of $50,000, (as periodically adjusted for cost-of­living increases by the Secretary), and, if the employer elects, was in the “top-paid group” of employees for the preceding year. An employee is considered to be in the “top-paid group” of employees for any year if the employee is in the group consisting of the top 20% of employees ranked on the basis of compensation paid during the year. Depending on the current definition in the plan document, plans may be required to be amended to comply with this definition. It is expected that the amendment should result in less plans failing the ADP Test under the PR Code.

Definition of Year of Service

None

A 12-month period during which an employee completes at least 1,000 hours of service. Most plans already provide this definition since it is similar to the definition under ERISA.

Provision

PR Code

2006 Code

Minimum Participation Requirement

None

Plan cannot require, as a condition of plan participation, that an employee complete a period of service extending beyond the later of: (1) the date the employee reaches age 21; or (2) the day the employee completes one “year of service.” Plan cannot exclude from participation (on the basis of age) employees who have attained a specified age. Plan must provide that an employee who has satisfied the minimum age and service requirements and who is otherwise entitled to participate in the plan, be admitted into the plan no later than the earlier of the following dates: (1) the first day of the first plan year beginning after the date the age and service requirements were satisfied; or (2) the date six months after the date on which the age and service requirements were first satisfied. Most plans already provide these rules since they are similar to the requirements under ERISA, except for plans that provide that a participant's right to his accrued benefit is 100% vested after not more than two years of service which may require that an employee be at least 21 years old or complete at least two years of service, whichever is later, to participate. Such plans may require an amendment to comply with the proposed rules.

Provision

PR Code

2006 Code

Minimum Vesting Schedules

None

Plan must provide for full vesting on the attainment of normal retirement age. Accrued benefit derived from employee contributions made to the plan must be nonforfeitable. Participants must acquire a nonforfeitable right on all employer contributions either: (1) to 100% of employer matching contributions on completion of three years of service; or (2) in accordance with the following schedule: Nonforfeitable Years of Service Percentage 2 20% 3 40% 4 60% 5 80% 6 100% (Vesting rules would be effective for contributions made after June 30, 2006.) 2006 Code would provide faster vesting than ERISA for employer contributions other than matching contributions. Depending on current vesting provisions, a plan may be required to be amended to comply with these rules.

Provision

PR Code

2006 Code

Definition of Compensation

Amount taken into account under the plan in calculating the elective contribution that may be made on behalf of the employee. (PR Code Regulations)

Compensation received from the employer during the year, including any pre-tax contributions made to a Puerto Rico qualified plan. Depending on the current language used for the definition of compensation in the plan document, plans may be required to be amended to comply with the new definition.

Participant’s Rights Upon Merger or Consolidation

None

Plan must provide that if the plan merges or consolidates with another plan, participants will be entitled to termination benefits after the merger or consolidation at least equal to the pre-merger or pre-consolidation termination benefits. Most plans already provide these rules since they are similar to the requirements under ERISA.