Q. Our current pre-approved 403(b) plan does not exclude residents of Puerto Rico, but our PPA defined contribution plan does. Does the Puerto Rican tax code provide for 403(b) plans? Do we exclude them in a U.S. based 403b plan based on the U.S. tax code? But if we do, do we violate universal availability by writing in the exclusion?
A. First there is not a good answer for this! For the elective deferral piece, you are correct — you would have to include residents of Puerto Rico, since these employees are not considered NRAs for retirement plan coverage rules. Employers have, in fact, written amendments to their 403(b) plans to have the plan dual qualified (which is interesting because there is no 403(b) in the Puerto Rico Code. You could also set up a separate plan for them that is a 401(k) and have that one dual-qualified as well. The exclusion from the 403(b) plan would be “participating in another plan.” The problem with the second option is the potential taxation problems for the Puerto Rico employees if it is not dual-qualified.