Puerto Rico

A plan qualified only under Puerto Rico's Internal Revenue Code, whose trust is organized under Puerto Rico law for employees who live in Puerto Rico or work mainly there.¹ The employer pays in, and so may the employees: for 2026, an employee in a plan qualified only in Puerto Rico may defer up to $15,000 of pay, and a defined contribution account may take $72,000 a year in all.² Where all the participants are residents of Puerto Rico, ERISA section 1022(i)(1) treats the trust as exempt from U.S. tax under §501(a).³

A foreign trust, though ERISA treats it as exempt under §501(a).

A foreign trust. A trust is domestic only if a U.S. court can exercise primary supervision over it and U.S. persons control its substantial decisions, and the courts of a territory are not courts within the United States for that test,^4,5 so a trust supervised by Puerto Rico's courts is a foreign trust. The IRS says so of Puerto Rico trusts in general, and of this kind of plan trust in its ruling on one.^6,7 ERISA section 1022(i)(1) makes the trust exempt from U.S. tax on its own income, but it does not make the plan a qualified plan.^3,8

Not a §402(b) trust on the statute's words, and not a qualified plan either. No IRS guidance.

§402(b) taxes an employer's contributions to an employees' trust that is not exempt under §501(a),⁹ and ERISA treats a section 1022(i)(1) trust as exempt, so on the statute's words §402(b) does not describe it. Nor do its participants get the qualified-plan rules: the IRS says they are not generally eligible for the favorable treatment of §402.^10,8 No IRS guidance says how a U.S. person is taxed on its contributions and payouts, or whether a participant is treated as owner of the part their own contributions fund.

For a bona fide resident of Puerto Rico, income from Puerto Rico sources is left out of U.S. income,^11,12 and the IRS treated payouts from such a plan's employer contributions and later earnings as Puerto Rico income, so long as the trust stays a Puerto Rico trust and the work is done in Puerto Rico.¹³ The statute's exception from Part I is for trusts described in §402(b), §404(a)(4), or §404A.¹⁴ §404(a)(4) describes a trust that would qualify under §501(a) but for being created outside the United States,¹⁵ which fits only a plan that meets every §401(a) rule; the plan in the IRS's ruling would not have met §401(a) even with a U.S. trust.¹⁶

Rev. Proc. 2020-17: not settled whether a territory is a foreign jurisdiction. The cautious course is to report.

Rev. Proc. 2020-17 exempts an eligible individual, one who has filed U.S. returns and reported the trust's income as U.S. law requires,¹⁷ from Forms 3520 and 3520-A for a retirement trust that is a foreign trust for U.S. tax purposes, established under the laws of a foreign jurisdiction, and meets its conditions.^18,19 A plan qualified under Puerto Rico's Code may meet the conditions, which the plan's rules have to show one by one: its trust is not taxed under Puerto Rico law, and its contributions are limited.^1,2 The question is the first one.

Whether a U.S. territory is a foreign jurisdiction is not settled, and no IRS guidance answers it. For it: the revenue procedure is written for trusts that are foreign for U.S. tax purposes, which a territory's trusts are;^18,5 the Code treats a company organized under a territory's law as foreign, because only the States and the District of Columbia are the United States, and the Joint Committee on Taxation says entities organized there are generally foreign persons;^20,21,22 the IRS's examination manual says the territories are generally treated as foreign for U.S. tax purposes unless the Code says otherwise;²³ and the Form 8938 reporting the revenue procedure gives as a reason for the exemption counts an account at a territory's financial institution as a foreign asset.^24,25 Against it: the revenue procedure and the 2024 preamble explain the exemption by the restrictions imposed under the laws of the country where the trust is established,^26,27 and a territory is not a country. The Code names foreign countries and U.S. possessions separately, and Treasury defines a foreign country as territory under another government's sovereignty.^28,29 The FBAR rules count the territories as part of the United States,³⁰ and a bona fide resident of a territory leaves accounts at its own institutions off Form 8938,³¹ so the duplicate reporting the revenue procedure relies on may not exist for them. The 2024 proposal deals with territory trusts in an exception of their own, by the filer's residence and only for some territories.³² The proposed regulations' exemption for retirement and savings trusts uses the same words as the revenue procedure, so the same doubt applies to it.³³ Until the IRS says, the cautious course is not to rely on either exemption for a trust in a U.S. territory, and to report it in full.

No treaty: Puerto Rico is a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories, and federal tax rules apply to them in a way different from both the States and foreign countries.³⁴ The IRS has a tax coordination agreement with each of the five territories, which resolves inconsistent treatment between the two tax systems;³⁵ no guidance says one changes Forms 3520 and 3520-A.

Cautious course: Part I for contributions you make, Part II and Form 3520-A for the part they fund, Part III for payouts.

No IRS guidance applies Forms 3520 and 3520-A to these plans, so this is the cautious course. Contributions you choose to make, deferrals of your pay included, are your transfers to a foreign trust that no statutory exception reaches unless the plan meets §401(a) apart from its trust's location: Part I for each year you make them.^36,37,14 As a U.S. person who transfers property to a foreign trust with a U.S. beneficiary, you yourself being one, you may be treated as owner of the part your contributions fund: Part II each year, with Form 3520-A or a substitute.^38,39,40 Payouts to you go on Part III; the exception for payouts reported as compensation covers §402(b) trusts, and ERISA treats this one as exempt.^41,42,43 No Form 4970: payouts from an employees' trust are not taxed under the trust distribution rules.⁴⁴ What your employer alone pays in is its transfer, not yours.³⁶

Owing no U.S. tax on the plan, because its income is from Puerto Rico, does not remove any of these: transfers and distributions are reportable whether or not they have U.S. income tax consequences.⁴⁵ FBAR (FinCEN Form 114) and Form 8938 are separate, and an exemption from Forms 3520 and 3520-A does not remove them.^46,47

A Puerto Rico plan whose administrator has elected under ERISA section 1022(i)(2), irrevocably, to have its trust treated as created in the United States for §401(a), so that the plan must meet every U.S. qualification rule except the one on the trust's location.^48,49 The employer and the employees pay in as in any qualified plan.

A foreign trust, treated as created in the United States for §401(a).

Still a foreign trust. The election changes how §401(a) treats the trust, not where it is organized or which courts supervise it, and the IRS treats such a plan as qualified even though its trust is organized in Puerto Rico and is a foreign trust.^50,5

Not a §402(b) trust: its participants are taxed as in a qualified plan.

§402(b) does not apply. The plan is treated as a qualified plan for §§401(a), 402(a), and 404(a),⁵⁰ and its participants get the treatment §402 gives qualified-plan participants, through §402(d), which treats a trust that would qualify but for being created outside the United States as exempt.^51,52 For a bona fide resident of Puerto Rico, the part of a payout from Puerto Rico sources is left out of U.S. income.¹¹

None needed for Parts I and II. For Part III, Rev. Proc. 2020-17 is not settled for a territory.

No exemption is needed for Parts I and II (see the bottom line). For payouts, Rev. Proc. 2020-17 could remove Part III for an eligible individual,^17,19 but whether it reaches a trust in a U.S. territory is not settled, as the Puerto Rico-only plans block above explains.¹⁸

No treaty: Puerto Rico is a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories.³⁴

No Part I, Part II, or Form 3520-A. Cautious course: payouts go on Part III.

No Part I: the election requires the plan to meet every §401(a) rule except the trust's location,⁴⁹ which is the trust §404(a)(4) describes, so we read transfers to it as excepted.^15,14 No Part II or Form 3520-A: §679 does not apply to transfers to such a trust, and its participants are taxed as in a qualified plan, not as owners.^38,53,51 Payouts are distributions from a foreign trust, and the exception for distributions reported as compensation covers §402(b) trusts, which this one is not, so the cautious course is to report them on Part III.^41,42,43 No Form 4970: payouts are taxed under §402, not under the trust distribution rules.⁵¹ FBAR (FinCEN Form 114) and Form 8938 are separate, and an exemption from Forms 3520 and 3520-A does not remove them.^46,47

A U.S. employer's plan with its trust in the United States that covers employees in Puerto Rico, and so must meet both §401(a) and Puerto Rico's qualification rules.⁵⁴ The employer and the employees pay in.

A domestic trust: not a foreign trust at all.

A domestic trust. The IRS describes the trust of such a plan as created and organized in the United States and a U.S. person,⁵⁵ and a foreign trust is any trust that is not domestic.⁴

Does not apply: the trust is a qualified trust exempt under §501(a).

§402(b) does not apply: the trust is exempt under §501(a) so long as the plan meets §401(a),⁵⁶ and §402(b) reaches only a trust that is not exempt.⁹

None needed.

No exemption is needed: Forms 3520 and 3520-A report foreign trusts,^36,39,41 and Rev. Proc. 2020-17 covers only foreign trusts.¹⁹

No treaty, and none needed.

No treaty is involved: the plan's trust is in the United States.⁵⁵

Nothing on Form 3520 or 3520-A.

No Part I, no Part II or Form 3520-A, no Part III, and no Form 4970: the trust is a U.S. person, and Forms 3520 and 3520-A report foreign trusts.^36,39,41,55 If your part is moved to a plan qualified only in Puerto Rico, look again: the IRS treats that transfer as a distribution from the U.S. plan.⁵⁷ FBAR (FinCEN Form 114) and Form 8938 are separate, and an exemption from Forms 3520 and 3520-A does not remove them.^46,47

A Puerto Rico individual retirement account is a trust created under Puerto Rico law for the exclusive benefit of an individual and their beneficiaries, run by a bank, a savings institution, a broker, a trust company, an insurer, or a cooperative; it can also be an annuity or endowment contract issued by a life insurer.^58,59,60 The individual pays in, in cash. From 2025 the deduction limit is the U.S. IRA limit, $7,000 for 2025 and $7,500 for 2026, for each spouse on a joint return, but no more than the wages and professional income; before 2025 it was $5,000.^61,62,63,64 A payout before age 60 generally pays a 10% penalty.⁶⁵

A foreign trust when held in trust by a Puerto Rico institution; an annuity contract is not a trust.

A foreign trust when it is held in trust. The account is a trust created under Puerto Rico law in which the trustee holds the money for you and your beneficiaries, and Puerto Rico's own Code calls its document a trust deed.^58,66,67 A trust is domestic only if a U.S. court can exercise primary supervision over it and U.S. persons control its substantial decisions, and the courts of a territory are not courts within the United States for that test,^4,5 so a trust supervised by Puerto Rico's courts is a foreign trust. The IRS's 2024 example of a trust a bona fide resident creates in Puerto Rico reaches the same result.⁶⁸ An annuity or endowment contract issued by an insurer is a contract, not an arrangement in which trustees hold property for beneficiaries, so it is not reported as a foreign trust.^60,67

Does not apply: only you pay in.

§402(b) reaches only an employer's contributions to an employees' trust,⁹ so it does not apply to an account only you pay into. An employer or an employees' association may also set up these accounts for its people;⁶⁹ no IRS guidance addresses one an employer pays into.

Rev. Proc. 2020-17: the conditions may be met, but whether a territory is a foreign jurisdiction is not settled.

Rev. Proc. 2020-17 exempts an eligible individual¹⁷ from Forms 3520 and 3520-A for a retirement trust that meets its conditions,¹⁹ and a Puerto Rico IRA may meet each one: contributions are deductible;^70,61 the trustee reports contributions and payouts to Puerto Rico's Secretary of the Treasury;^71,72 contributions are limited to the deduction limit, which cannot exceed your wages and professional income;^73,74,75,64 and early payouts pay a penalty.^76,65 But the revenue procedure covers trusts established under the laws of a foreign jurisdiction, and whether Puerto Rico is one is not settled, as the Puerto Rico-only plans block above explains.¹⁸

No treaty: Puerto Rico is a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories.³⁴

Cautious course: Part I for each contribution, Part II and Form 3520-A each year, Part III for payouts.

This is the cautious course, because the exemption may not reach a territory. You are treated as owner of the account, because its income is held for you,^77,38 so Part II and Form 3520-A are due each year,³⁹ and if the trustee does not file Form 3520-A, you attach a substitute to your Form 3520.⁴⁰ Each contribution is a Part I transfer,³⁶ and payouts go on Part III.⁴¹ No Form 4970: the account's income is taxed to you each year as its owner.⁷⁸ For a bona fide resident of Puerto Rico, income from Puerto Rico sources is left out of U.S. income, and the forms are due anyway: reporting does not depend on U.S. tax.^11,45 FBAR (FinCEN Form 114) and Form 8938 are separate, and an exemption from Forms 3520 and 3520-A does not remove them.^46,47

A fideicomiso is an autonomous estate, separate from the settlor, the trustee, and the beneficiaries, set up under Puerto Rico's Trusts Act by a public deed or by a will.^79,80 Every trust set up in Puerto Rico must be entered in the Special Register of Trusts, or it is void.⁸¹ Since the 2026 amendments it may be revocable or irrevocable, and one whose deed does not declare it irrevocable is presumed revocable.⁸²

Usually a foreign trust: Puerto Rico's courts are not U.S. courts for the court test.

Usually a foreign trust. Puerto Rico law makes a fideicomiso a legal entity of its own,⁸³ but whether something is an entity for U.S. tax purposes is decided by U.S. law, not local law.⁸⁴ One in which a trustee holds property for the beneficiaries is a trust,⁶⁷ and one set up mainly to carry on a business for profit may be a business entity instead.⁸⁵ A trust is domestic only if a U.S. court can exercise primary supervision over it and U.S. persons control its substantial decisions, and the courts of a territory are not courts within the United States for that test,^4,5 so a trust supervised by Puerto Rico's courts is a foreign trust. The 2024 proposed regulations give this very case: a U.S. citizen and bona fide resident of Puerto Rico who creates and funds a trust in Puerto Rico has created a foreign trust and reports it on Part I.⁶⁸

A U.S. person who funds it is owner when it has a U.S. beneficiary; a foreign settlor only in two narrow cases.

Who is treated as owner decides who files Part II and Form 3520-A. A U.S. person who transfers property to the trust is treated as owner of the part it funds for any year in which the trust has a U.S. beneficiary,³⁸ and a U.S. citizen living in Puerto Rico is a U.S. person, as is any family member who is a U.S. citizen or resident.⁸⁶ Someone who funds the trust while not a U.S. resident and becomes one within 5 years is treated, for this rule and for Part I, as transferring that part of the trust on the day their U.S. residency starts.⁸⁷ A settlor who is not a U.S. person is treated as owner only if they can revoke the trust alone, or if only they or their spouse can receive distributions during their life.⁸⁸ Otherwise no one is owner, and the trust is taxed as a separate, non-grantor trust.⁸⁹

No treaty: Puerto Rico is a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories.³⁴

Part I for whoever funds it, Part II and Form 3520-A for an owner, Part III for whoever receives a distribution.

A U.S. person who transfers property to the trust files Part I for that year.³⁶ A U.S. owner files Part II and makes sure Form 3520-A is filed, or files a substitute, each year.^39,40 A U.S. beneficiary who receives a distribution files Part III for that year.⁴¹ A distribution from a non-grantor trust that carries out income the trust kept in earlier years is an accumulation distribution, taxed with an interest charge on Form 4970.⁹⁰ Owing no U.S. tax on the trust's income does not remove any of these: transfers and distributions are reportable whether or not they have U.S. income tax consequences.⁴⁵ Rev. Proc. 2020-17 does not apply: it covers only retirement trusts and medical, disability, or educational savings trusts.⁹¹ FBAR (FinCEN Form 114) and Form 8938 are separate and may also apply.⁹²