Can employers now set up cafeteria plans in Puerto Rico? Because of Puerto Rico House Bill (HB 453), which became law in January, 2017, one might think they are well on their way. In fact, the “Labor Transformation and Flexibility Act” (HB 453) included language to amend Section 1032.06 of the Puerto Rico Internal Revenue Code of 2011 which regulates cafeteria plans in Puerto Rico. The bill amended the term “qualified benefits” to now include the flexible benefits authorized by Section 125 of the U.S. Tax Code. However, upon a closer look, this isn’t the case.
Puerto Rico has its own income tax code and, as amended in 2004, added employer-sponsored flexible benefit plans. Puerto Rico Treasury 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. However, the term “flexible benefit plan” does not include a plan that provides for deferred compensation.
Employee benefit 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, in order to treat Puerto Rico cafeteria plans as a U.S. cafeteria plan, amendments to the U.S. Code are needed. The FICA tax exemption on employee contributions to a U.S. Code Section 125 cafeteria plan do not necessarily apply to a Puerto Rico Code cafeteria plan.
Clarification is still 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. So far, there’s no direction on where employers would submit such plans, how much the filing fee is and what the process is for qualification. As a result, in practice, there aren’t yet cafeteria plans in Puerto Rico.
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