The summer of 2014 has brought further guidance for health plan coverage in the U.S. territories and for retirement plan coverage in Puerto Rico. Issuers and employer sponsors of Puerto Rico group health plans and employer sponsors of Puerto Rico retirement plans should review their plans to ensure compliance and explore the possibilities provided by the recent guidance.

Healthcare Reform Mandates May Still Apply to Issuers and Group Health Plans in the U.S. Territories

In a letter issued by the Department of Health and Human Services (HHS) last month, the federal agency changed its position regarding the applicability of certain provisions of the Affordable Care Act (ACA) to the U.S. territories. Health insurance issuers and employers should proceed with caution, however, since many provisions of the ACA may still apply to the U.S. territories.

In determining the applicability of the Public Health Service Act (PHSA) ACA mandates to U.S. territories, HHS had previously relied on the definition of “state” in the PHSA, which includes the U.S. territories. In response to instability in the health insurance markets of the U.S. territories, however, HHS reexamined its position and, as of July 16, 2014, determined that the controlling definition of “state” is provided in Title I of the ACA, which does not include the U.S. territories. HHS’ new interpretation applies prospectively.

Based on the change in the definition of “state,” the following requirements of the ACA do not apply to individual or group health insurance issuers in the U.S. territories:

  • guaranteed availability (PHSA § 2702);
  • community rating (PHSA § 2701);
  • single risk pool (ACA § 1312(c));
  • rate review (PHSA § 2794);
  • medical loss ratio (PHSA § 2718); and
  • essential health benefits (PHSA § 2707).

Notably, however, many mandates of the ACA may still apply to issuers and employers. The recent letter from HHS has no impact on: (1) the requirements of the ACA that were incorporated into the Internal Revenue Code and the Employee Retirement Income Security Act, or (2) the requirements of PHSA enacted by the ACA that apply to non-federal governmental plans. For example, group health plans covering participants in the U.S. territories must still comply with:

  • prohibition on lifetime and annual limits (PHSA § 2711);
  • prohibition on rescissions (PHSA § 2712);
  • coverage of preventative health services (PHSA § 2713); and
  • revised internal and external appeals process (PHSA § 2719).

U.S. territories may adopt similar mandates, and Puerto Rico has adopted mandates similar to the ACA through the Puerto Rico Health Insurance Code, which applies to insured health plans. As a result, certain mandates of the ACA that are no longer applicable through federal law may still apply through local law. For example, Section 2.020 provides that part of the public policy of the Puerto Rico Health Insurance Code is to achieve the standards created by federal health reform implanted through the ACA, and Section 2.050 provides that the Puerto Rico Health Insurance Code is deemed amended as needed to conform to federal law.

Therefore unless and until the Puerto Rico Health Insurance Code is amended to take advantage of HHS’ exemptions, in the design and administration of health plans, issuers and employers covering individuals and employees in Puerto Rico or other U.S. territories should carefully consider what requirements of the ACA may or may not apply.

Puerto Rico Code Permits Tax Prepayment on Retirement Plans

Through the Tax System Adjustment Act (Act 77-2014), the Puerto Rico Internal Revenue Code now permits the prepayment of taxes on defined contribution or defined benefit retirement plan benefits for a limited period from July 1 to October 31, 2014. The Puerto Rico Treasury provided additional guidance on the logistics of the tax prepayment in Administrative Determination No. 14-16 (AD 14-16), recently issued on August 6, 2014.

AD 14-16 provides that any participant or retirement plan in Puerto Rico can prepay the taxes on a participant’s accumulated and undistributed benefit. The tax rate is 8 percent if the plan is qualified with the Puerto Rico Treasury and 15 percent if the plan is not qualified. A plan is considered qualified if the appropriate filing with the Puerto Rico Treasury under new Code Section 1081.01(a) was made as of the date the participant completes the process of prepayment. A final decision on the plan’s application for qualification is not required.

Prepayments can be made in full or partial amounts and can be funded through the participant’s own funds or through funds distributed from the plan. Funds distributed from the plan will require a plan amendment, but the amendment does not have to be filed for a determination with the Puerto Rico Secretary of Treasury. If the individual is a participant in multiple retirement plans, the individual can make an election for prepayment on a per plan or aggregate basis. The plan sponsor is not required to permit distributions from the plan for prepayment, but it may choose to do so. If the prepayments are made from funds distributed through the plan, the plan would have to maintain records regarding the prepayment.

As a practical matter, retirement plans that are dual-qualified (i.e., qualified not only under the Puerto Rico Internal Revenue Code but also under the U.S. Internal Revenue Code) cannot permit prepayment of taxes through distribution from the plan because prepayment of Puerto Rican taxes is not a distributable event under the U.S. Code.

If a prepayment is made, the participant’s tax basis in the plan would be increased by the amount of the prepayment, and any distribution where the tax was not prepaid is subject to taxation at the then applicable tax rate. The prepayment is an irrevocable choice and cannot be refunded. Participants must make the tax payment with the Puerto Rico Treasury by October 31, 2014, and file tax reporting forms. A plan sponsor or service provider making the payment must complete it by November 15, 2014 and file tax reporting forms.

Plan sponsors of retirement plans that are only qualified in Puerto Rico may wish to explore the possibility of permitting prepayment of taxes from the plan. Specific issues to consider include maintaining records on the prepayment, and providing notice to participants of the window to prepay Puerto Rican taxes. Before incurring the cost to amend the plan, however, plan sponsors should carefully evaluate their workforce to determine if participants would be interested in prepaying their taxes.


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