Compliance Briefing Center

Legislation and Reform

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Puerto Rico and Cafeteria Plans

Can employers now set up cafeteria plans in Puerto Rico? Because of a recent, yet-to-be enacted, Puerto Rico House Bill (HB) 453 one might think they are well on their way. However, with a deeper dive, the facts don’t support this enthusiasm. 

The recently filed “Labor Transformation and Flexibility Act” includes language to amend Section 1032.06 of the Puerto Rico Internal Revenue Code of 2011, which regulates cafeteria plans in Puerto Rico.

Puerto Rico has its own income tax code and, as amended in 2004, added employer-sponsored flexible benefit plans. The benefits allowed under Puerto Rico code sections and those allowed through IRS Code Section 125 in the United States seem to be different. Puerto Rico Circular letter number 04-07 states that qualified benefits are contributions of an employer to group life insurance, employee health or accident group plans, and dependent care assistance plans, plus group life insurance under $50,000 of coverage. Employee benefits contributions made with pretax contributions, as well as paid vacation days purchased by the employee will be treated as cash under the Puerto Rico tax code. That means FICA will be paid on those contributions. Even with the passage of HB 453, amendments to the US Code are needed to treat a Puerto Rico cafeteria plan as a US cafeteria plan that allows employee contributions to be considered as non-taxable wages for FICA purposes.

Cafeteria plan proposed amendments within the “Labor Transformation and Flexibility Act” may or may not be included in the final legislation to be signed by Governor Ricardo Rossellò. However, even after passage of the Act, clarification will be needed to ensure that employee contributions can be exempt from FICA. In addition, Puerto Rico will need to resurrect the qualification process for plans. The qualification process requires employers to submit their cafeteria plan to a government office, with a specific filing fee, to have it qualified prior to establishing the plan for employees.

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