Esta ley enmienda el Código de Rentas Internas de Puerto Rico de 1994 para incorporar los planes de beneficios flexibles para empleados (planes de cafetería) en el sistema contributivo local. Permite a los empleados elegir entre beneficios tributables (como efectivo) y beneficios exentos (como seguros de salud o vida), con ciertas exclusiones y reglas para participantes altamente compensados y pagos por cuidado de dependientes. Establece límites para la exclusión de pagos por cuidado de dependientes y define los requisitos para los centros de cuidado y los proveedores de servicios.
To add paragraphs (48), (49) and (50) to subsection
(b) and add subsections
(l) and
(m) to Section 1022 of Act No. 120 of October 31, 1994, as amended, known as the "Puerto Rico Internal Revenue Code of 1994," in order to incorporate within our tax system a flexible employee benefits plan.
In our very competitive world employers continue to devise more options to attract or retain their employees. These options, besides being attractive to the employee, must be cost-effective for the employer.
When evaluating the advantages of one job offer against another not only is the salary considered but also the fringe benefits the employer offers. These benefits are at times the determining factor for choosing one job over another.
Under the flexible benefits plans, better known as cafeteria plans, of the Federal Internal Revenue Code, the employee is offered the option of choosing from among a variety of fringe benefits the employer offers, some of which are taxable benefits while others are exempt from the payment of income tax. Some of the taxable benefits include cash, while an example of an exempt benefit would be the contribution the employer makes to the employee's health or accident insurance plans. Any exempt benefit provided under a plan must be regarded as exempt income under the provisions of the Puerto Rico Internal Revenue Code of 1994, as amended.
The flexible benefits plan is most attractive because it allows the employee to choose from among two or more fringe benefits the one which best meets his/her particular needs. The employee is also able to choose whether to receive taxable compensation or fringe benefits.
Should the employee choose to receive additional cash compensation his/her cash flow would increase. Thus he/she somewhat compensates for any lack of economic improvement at work. However, the economic benefits thus obtained shall be subject to the payment of income tax. On the other hand, flexible benefits plans might help employees of those businesses that adopt said plan to reduce the amount they would have to pay as income tax; that is, if said employees choose to exchange taxable benefits for exempt benefits.
The approval of this measure shall provide for the incorporation of benefits similar to those granted in the federal sphere regarding the flexible benefits plans for employees into the Puerto Rico Internal Revenue Code of 1994, as amended.
The advantages these plans offer shall be of great benefit to our middle class. These employees will be able to enjoy additional income if they choose to receive the benefits as cash, or they may enjoy fringe benefits that would not increase their income but would compensate for other expenses they would otherwise have to incur, as for example the payment of medical insurance.
Section 1.-Paragraphs (48), (49) and (50) are hereby added to subsection
(b) and subsections
(l) and
(m) added to Section 1022 of Act No. 120 of October 31, 1994, as amended, to read as follows: "Section 1022.-Gross Income
(b) Exclusions from Gross Income.-The following items shall not be included in the gross income, and shall be exempt from taxation under this Subtitle: (1) $\ldots$ (48) Flexible benefits plan.-Those amounts paid or accrued by an employer for the benefit of an employee under a flexible benefits plan that may be excluded from the gross income pursuant to subsection
(l) of this Section. (49) Life insurance premiums.-The premiums paid by an employer for group or collective life insurance policies that cover the lives of his/her employees who meet the requirements of Section 14.010 of the Puerto Rico Insurance Code, as amended, for an amount of up to fifty thousand $(50,000)$ dollars for protection. The premiums attributable to the cost for protection of the insurance in excess of this limit are taxable for the employee in the taxable year when they are paid. (50) Payments for the care of dependants.-The amounts paid or accrued by an employer for the benefit of an employee pursuant to the provisions of subsection
(m) of this Section, provided that said benefits are part of a flexible benefits plan established according to the provisions of subsection
(l) .
(c) $\ldots$ (1) Flexible Benefits Plan (Cafeteria Plans)
(1) General rule.-The gross income of a participant in a flexible benefits plan shall not include any amount whatsoever used according to said plan to acquire qualified benefits, only because under the plan the participant may choose from among the benefits the plan offers. (2) Exception for highly compensated participants.- (A) Highly compensated participants.-In the case of a highly compensated participant, the provisions of paragraph (1) shall not apply to any benefit attributable to a year in the plan during which it is discriminated in favor of -
(i) individuals highly compensated as to their eligibility to participate, or (ii) participants highly compensated as to contributions and benefits. (B) Year in which the benefits are deemed as received.-Any benefit described in paragraph (A) shall be treated as received or accrued in the tax year of the participant during which the year of the plan ends. (3) Discrimination as to benefits or contributions.-For the purposes of subparagraph (ii) of paragraph (A) of clause (2), a flexible benefits plan is not discriminatory if the qualified benefits and the total benefits (or the employer contributions attributable to statutorily exempt benefits and the employer contributions for total benefits)
available under the plan do not discriminate in favor of highly remunerated participants. (4) Definitions.-For the purpose of this clause: (A) Flexible benefits plan.-
(i) The term 'flexible benefits plan'.-means a an established in writing and approved by the Secretary under which - (I) all its participants are employees, and (II) the participants may choose between two or more benefits consisting of cash or qualified benefits. (ii) Exception for deferred compensation plans.The term 'flexible benefits plan' does not include a plan that provides for deferred compensation, except those profit-sharing plans or stock bonds plans that include a qualified agreement of cash or deferred contributions (as defined in Section 1165(e)), and only for that amount chosen by a covered employee to be contributed by his/her employer to that type of plan. (iii) Limits for health or accident group plans.An employee participating in a flexible benefits plan that provides for contributions to be made by an employer or accident or health group plans for his/her employees as described in clause (30) of subsection
(b) of
this Section, may not exclude said health or accident benefits, except when said participating employee shows that he/she is covered by another private health plan be it as principal covered party or as spouse or dependant. (B) Highly compensated individual and participant.-
(i) The term 'highly compensated individual' means an individual described in sub-items (I), (II), (III) or (IV) of subparagraph (ii). (ii) The term 'highly compensated participant means a participant who is: (I) an official, (II) a shareholder who holds over five (5) percent of the voting stock or of the total value of all stock types of the employer. (III) highly compensated according to the provisions of Section 1165(e) (3) (E) (iii), or (IV) the spouse or dependent (within the meaning in Section 1025(d) of an individual described in items (I), (II) or (III). (C) Qualified benefits.-The term 'qualified' benefits means the cost or value of any benefit excluded from the gross income of the employee due to the
express provisions of subsection
(b) of this Section, Said term also includes any portion of a premium of a group or collective life insurance policy that as provided in clause (49) of subsection
(b) would be included in the gross income of the insured, as would any other benefit allowed by regulations. However, said term shall not include any product being promoted, marketed or offered as long term care insurance. (5) Special rules.- (A) A plan under a collective bargaining agreement is not deemed to be discriminatory.-For the purposes of this clause, a flexible benefits plan shall not be deemed discriminatory if said plan is maintained under a collective bargaining agreement, which is considered by the Secretary of Labor and Human Resources and the Labor Relations Board to be an agreement between representatives of the employees and one or more employers. (B) Health benefits.-For the purposes of subparagraph (ii) of paragraph (2)(A), a flexible benefits plan which provides health benefits shall not be deemed as discriminatory if -
(i) the contributions under the plan in benefit of each participant include an amount which - (I) constitutes one hundred (100) percent of the cost of the cover of the health
benefit under the plan of the majority of the highly compensated participants in a similar situation, or (II) is equal to or greater than seventy-five (75) percent of the cost of the cover of the health benefit of the participant (in a similar situation) that has the highest cost that covers the health benefit under the plan, and (ii) the contributions and benefits under the plan in excess of those described in subparagraph
(i) maintain a ratio in proportion to the compensation. (C) Certain eligibility rules not treated as discriminatory.-For the purposes of subparagraph
(i) of paragraph (A) of clause (2), a classification shall not be treated as discriminatory if the plan:
(i) benefits a group of employees as described in Section 1165(a)(3)(b)(i)(I), and (ii) meets the following requirements: (I) no employee is required to be employed for over three (3) years by the employer or employers who maintain the plan as a condition for participating in the plan, and the employment requirement for every employees is the same; and
(II) any employee who has met the aforementioned employment and who would otherwise be entitled to participate in the plan must commence his/her participation not later that the first day of the first year of the plan beginning after the date on which the employment requirement is met, unless the employee has been separated from service before the first day of the year of the plan. (6) Reports required.- (A) Conservation of information.-Any employer who offers a flexible benefits plan during a tax year must conserve that information which would be necessary for determining if the requirements established on this clause have been met. (B) Information or documents to be submitted.The Secretary may require, through regulations, that any information or document related with the plan that may be deemed necessary be filed. (7) Commonwealth and Municipal Government noneligibility.-A flexible benefits plan shall not be deemed as a flexible benefits plan under the
provisions of this clause if it is part of a plan established by the Legislature of Puerto Rico, the Government of the Capital, the municipalities and the agencies, instrumentalities and public corporations of the Commonwealth of Puerto Rico.
(m) Payment for the Care of Dependents.- (1) General Rule.-Any employee who provides support to a home whose members include one or more qualified individuals (as provided in clause (2) of this paragraph), may exclude under clause (50) of subsection
(b) of this Section, the amounts paid or accrued by his/her employer to cover those expenses incurred by the employee that are related to the case of said qualified individuals. (2) Limit of the exclusion.- (A) General rule.-The amount that may be excluded pursuant to clause(1) may not exceed one thousand two hundred $(1,200)$ dollars per year for a qualified individual or two thousand four hundred $(2,400)$ dollars per year for two (2) or more qualified individuals. (B) Inclusion.-Any amount paid in excess of the limit established in paragraph (A) shall be included in the gross income of the employee for the tax year in which are provided the services related to the care of
dependents (even if the payment for said services is made in a subsequent tax year). (3) Payment to related individuals.-No amount incurred by or paid to an employee by his/her employer for the care of dependents during the tax year, may be excluded under this subsection if said amount was incurred or paid to an individual with relation to which, for said tax year, said employee or spouse of said employee was granted an exemption under Section 1025(b). (4) Definition of qualified individual.-The term 'qualified individual' means - (A) a dependent of the employee of not more than fourteen (14) years of age and in respect to whom the employee is entitled to claim an exemption under Section 1025(b). (B) a dependent of the employee who is mentally or physically incapable of caring for him/herself; or (C) the spouse of the employee, if he/she is mentally or physically incapable of caring for him/herself. (5) Services rendered outside the employee's home.- (A) General rule.-The expenses referred to in clause (1) shall not include the amounts paid for services rendered outside the employee's home.
(B) Exception.-The expenses related to the care of qualified individuals which are incurred for services rendered outside the employee's home, may be taken into consideration for the purposes of clause (1) only if incurred for the care of -
(i) a qualified individual as described in paragraph (A) of clause (4); or (ii) a qualified individual (not described in paragraph (A) of clause (4) who regularly spends at least eight (8) hours a day in the employee's home. (C) Care centers.-The expenses related to the care of qualified individuals which are incurred for services rendered outside of the employee's home by a care center may be taken into consideration only if -
(i) said center complies with all applicable laws and regulations, and (ii) the requirements of paragraph (B) are complied with. (D) Definition of care center.-For the purposes of this paragraph, the term 'care center' means any facility that -
(i) provides care for more than six (6) individuals who do not reside in the facility, and
(ii) receives a remittance or payment for providing services to any individual (regardless of whether said facility is a money making operation). (6) Special rules.-For the purposes of this clause - (A) Support of a home.-Any employee shall be treated as if providing support to a home during any period only if over half of the cost of supporting said home for said period is provided by said employee (or, in case the employee is married during the period, it is provided by said employee and his/her spouse). (B) No deduction shall be allowed for amounts excluded.-No employee shall be allowed to claim, as a deduction under any other provision of this Subtitle, any amount excluded from his/her gross income under this clause. (C) Treatment of facilities located at the work place.-In the case of facilities provided by the employer located in the work place, the amount that may be excluded for the care of qualified individuals shall be based on:
(i) the use of the facility by the qualified individual, and
(ii) the value of the services provided in relation to said qualified individual. (D) Information required in relation to the services provider.-No amount may be excluded from the gross income of the employee according to the provisions of this clause unless:
(i) the name, address and social security number of the person to whom the payment is made is included in the income tax return of the employee, or (ii) if said person is a nonprofit entity according to the provisions of Section 1101, the name and address of said person must be included in the income tax return of the employee. (E) Special rule in the case of divorced or separated parents.- If -
(i) clause (2) of Section 1025(e) is applicable to any offspring regarding any calendar year, and (ii) said offspring is not more than fourteen (14) years of age, the parent with the right to custody (as described in Section 1025(e)(1)) may treat said offspring as a qualified individual."
Section 2.-Effectiveness. This Act shall take effect immediately after its approval.
I hereby certify to the Secretary of State that the following Act No. 277 (H.B. 4746) of the $7^{ ext {th }}$ Session of the $14^{ ext {th }}$ Legislature of Puerto Rico:
AN ACT to add paragraphs (48), (49) and (50) to subsection
(b) and add subsections
(l) and
(m) to Section 1022 of Act No. 120 of October 31, 1994, as amended, known as the "Puerto Rico Internal Revenue Code of 1994," in order to incorporate within our tax system a flexible employee benefits plan, has been translated from Spanish to English and that the English version is correct.
In San Juan, Puerto Rico, today $25^{ ext {th }}$ of October of 2005.
Francisco J. Domenech Director