International Employees and Employers:Retirement Plan Issues

Virginia K. Sutton, QKA, QPFCConsultant Account Executive

VKS ConsultingJohnson & Dugan

vksutton@johnsondugan.com1

International Employees and Employers: Retirement Plan Issues

There are a myriad of issues that arise when an international employer sponsors a retirement plan and when there are international employees participating in a retirement plan.

• The types of laws that apply to international employees and employers

• How taxation issues may arise

• How to evaluate common plan document issues that need to be addressed

Poll Question #1

Do you have US clients that have a non-US parent company or a non-US company in their controlled group?

A. Yes

B. No

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Global Mobility and Impact on Qualified Plans

Plan Document/

Plan DesignOperationalCompliance

• Statutory exclusions

• Plan design exclusions

• Definition of compensation

• Controlled groups

• Census and payroll data

• Compensation

• Tax-deferral

• Account tracking

• Addresses

• Non-discrimination Testing

– Who Are eligible employees?

– Compensation

• Qualifying events

• M&A/coverage

Legal Issues (Some…)

Immigration ERISATax

• Global mobility of workers:

– Resident/non-resident aliens

– Visa and documentation

– Does the employee have a SSN?

• Controlled groups

• Coverage/eligibility

• Compensation

• Qualifying events

• Participant disclosures/notices

• Compensation– Plan– Personal tax

returns– Tax return in

home country– Documentation

of account post severance: 1099

To Work in the US, You Must Have:

Employer-Sponsored Work Visas

– L1 visa

•Worker on assignment from another part of the company

– B-1 business visa

• Temporary US work Visa: one to six months

– H1B-visa

Worker Documentation

• A permanent resident card (aka green card)

• An employment authorization document (I-765/work permit)

• An employment-related visa that allows you to work for a particular employer

H-1B Visa-Compensation

• The taxation of income for H-1B employees depends on whether they are categorized as either non-resident aliens or resident aliens for tax purposes

• A non-resident alien for tax purposes is only taxed on income from the United States

• A resident alien for tax purposes is taxed on all income, including income from outside the US

H-1B employees should be on the

census for compliance and testing, as they

will have US income. Their

date of hire will typically reflect US date of hire.

L-1 Visa Workers

• An L-1 visa is a visa document used to enter the United States for the purpose of work in L-1 status

• It is a non-immigrant visa, and is valid for three months to five years based on a reciprocity schedule

• With extensions, the maximum stay is seven years

Short duration visa employees will likely not participate in the Plan, but if on US payroll they should be included on census.Employer should also be advised these workers are eligible for the Plan unless specifically excluded and Plan passes coverage.

L-1 Visa Workers

• L-1 visas are available to employees of an international company with offices in both the United States and abroad

• The visa allows such foreign workers to relocate to the corporation's US office after having worked abroad for the company for at least one continuous year within the previous three prior to admission in the US

• The US and non-US employers must be related in one of four ways: parent and subsidiary; branch and headquarters; sister companies owned by a mutual parent; or 'affiliates' owned by the same or people in approximately the same percentages

Tax Issues

Participant Tax Issues

• Employee will pay tax in US and foreign country depending on length of residence

• Length of employment and employer contribution influences enrollment

• Taxation of distributions– Home country and tax treaties will

determine

Plan Issues

• Plan document

• Plan qualification– Who is a participant

– Non-discrimination testing

– Compensation

– Distributions

– Beneficiaries

Poll Question #2

Do you have a CPA or other strategic partner that you can refer your Plan Sponsor Clients or their Participants for income tax questions if they plan to not stay in the United States, but have a 401(k) Plan balance?

A. Yes

B. No and we really don’t have a need

C. No and I wish there was a resource for these and other global mobility issues

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Plan Document Issues

• Who is eligible?

– Statutory exclusion of non-resident aliens

– Potential exclusion of employees of foreign parent company or other affiliated non-US companies with no US income

– Any employee on US payroll should be included if they meet age/service eligibility criteria

Poll Question #3

Do you use a plan document that automatically excludes non-US controlled group members or non-US residents with no US source income?

A. Our plan document automatically excludes non-US members of controlled group

B. Our plan document automatically excludes non-US residents with no US income

C. Plan sponsor must elect to exclude non-US residents with no US income

D. I am not sure

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Plan Document Issues

• Compensation

– Is there compensation paid by foreign parent?

• Does it run through US payroll?

• Equity compensation?

– Is compensation paid by foreign parent excluded in the plan document?

• Exclusion by foreign/non-adopting employer

Plan Contributions

• Straightforward when employee is on US payroll

– Note employee can be paid prior to SSN becoming available

– Does plan sponsor (HR/payroll department) understand how to capture compensation?

– If foreign parent is responsible for payroll, do those individuals understand what is required to remit deferral contributions in a timely manner?

Poll Question #4

If you need to speak to your international clients, do you offer international conference call service or can you use a web-based conference or video call service?

A. Our conference call service allows/provides international calling

B. We set up a web-based conference or video call (Skype/Google hangout, etc.)

C. We rely on our client to set up a dial-in number

D. We rely on our recordkeeper partner to set up a dial-in number

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Compliance Testing

Non-Discrimination Testing

• Coverage testing

• ADP/ACP– Depending upon how large a

H1B population, participation may suffer as well as ADP results, unless H1B are HCE

• Audit requirements and 5500 preparation may be more complex

Data Management

• HR/payroll contacts may need help/reminder of who should be included on census

• Verify compensation is reported accurately with component parts (e.g., excluded compensation)

Qualifying Events

• Is there separation of service?

– Employee transfers back to non-US parent company or other affiliated company in controlled group:

• Employee is terminated from US payroll; no longer eligible for contributions

• Not eligible for rollover/distribution either

This dynamic will be a communication issue for HR and affected employees

Maintaining accounts and address information is a key data-management issue

Vesting and Distribution Payments

• How will vesting be calculated?

– Employee transfers back to non-US parent company or other affiliated company in controlled group

• Years of service are captured for time at US company

• Break-in-service rules

– Rollover to IRA at financial institution

• Online access to account balances allow cross-border access

– Direct distribution and 1099 reporting

Most foreign pensions have

immediate vesting so companies may

adopt 100% immediate vesting

for the US plan. Alternatively,

companies will look to provide

benchmark-appropriate vesting

Beneficiaries

• Requirement/best practice to get beneficiary information

– Operational issues:

• Beneficiary may not have SSN

• Beneficiary may not live in the US

• Who/how provide benefit to beneficiary

Notice and Disclosure Rules

• Does population qualify for electronic delivery of disclosures and required notices?

• If employee returns to home country, can statements and notices/disclosures reach them?

– Will recordkeeper mail to foreign locations?

Poll Question #5

If the client asked you to mail to their non-US based participants, would you?

A. Yes, we do whatever we need to do to keep our clients happy

B. Yes, we will/would do the mailing for an additional project charge

C. No, we just don’t have the manpower to do extra projects like this

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Practical Matters

• Globally mobile workers are more likely to become lost participants

– Catch 22 of plan participation

• Data management is key—especially if foreign entity responsible for US finance/HR functions

• Plan governance can also become an issue

– Do employees/executives of the foreign parent have sufficient knowledge/expertise of ERISA to be committee members?

– Fiduciary training and ERISA counsel to assist

In Conclusion

• Use statutory exclusions to your advantage and know your plan document’s base language

• Educate clients get you proper data

• Partner with recordkeepers to leverage online tools and partner with advisers for employee communication

• Reach out to ERISA counsel

Questions?

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