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Can a US company permit Canadian employees who are not US citzens to participate in its retirement plan? They are working in Canada and are not US citizens.

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What sort of "retirement plan" are you talking about ?

Are these employees on a US governed/regulated payroll ?

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Guest Spock
Definitely, YES!

I've heard this already.

What is the basis of allowing someone without US source income the ability to participate in a US pension plan?

How can an employer deduct the contribution?

If a 401(k) plan, what is the basis of the deferral if the employee is not subject to US withholding laws?

Presumably, th ePlan's defintion of Employee and Employer need to accomodate this, if it's in fact possible, but I have reservations.

A citation would be helpful.

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410(b)(3) EXCLUSION OF CERTAIN EMPLOYEES. --For purposes of this subsection, there shall be excluded from consideration --

...

410(b)(3)© employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)).

This cite would not make any sense if they were required to be excluded from plans.

If you have a prototype document handy, look at the choices for defining eligible employees. I don't remember ever seeing one that did not allow the inclusion of non-resident aliens with no US source income.

It's older, but PLR 8144028 has a discussion on the topic.

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Guest Spock
410(b)(3) EXCLUSION OF CERTAIN EMPLOYEES. --For purposes of this subsection, there shall be excluded from consideration --

...

410(b)(3)© employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)).

This cite would not make any sense if they were required to be excluded from plans.

If you have a prototype document handy, look at the choices for defining eligible employees. I don't remember ever seeing one that did not allow the inclusion of non-resident aliens with no US source income.

It's older, but PLR 8144028 has a discussion on the topic.

The citation applies to coverage testing. Non-resident aliens are people who live in the US but have not established legal residency, work at the location of a US company, but receive no earned income from US sources because they are being paid by their foreign employer. In that case, that person is excluded from both the numerator and the denominator in the 410(b) test.

On what basis would the non-resident alien earn an accrual? To answer that question you need to look at the Plan’s definition of Compensation. Often the plan refers to “W-2 Comp” or “wages within the meaning of IRC 3401”. Thus, if a US employer has a Canadian sub, and the Canadian employee resides in Canada and has no US income, I don’t see how that employee can earn a benefit in the US plan.

If I’m missing something please advise.

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Here is an excerpt from the PLR I referenced.

Section 410(b)(3) was added to the Code by Public Law 93-406, the Employee Retirement Income Security Act of 1974 (ERISA). Conference Report 93-1280, 93rd Cong. 2nd Sess. 264, 1974-3 C.B. 425, provides that employees who are nonresident aliens with no United States income from the employer are to be excluded for purposes of applying the breadth-of-coverage requirements and for purposes of applying the antidiscrimination rules (whether or not they are covered under the plan).

Section 410(b)(3) provides for the exclusion, only for purposes of applying the coverage requirements, of nonresident aliens with no U.S. source income. It does not mandate their exclusion. The exclusion of these nonresident aliens is permissive in order that U.S. citizens not be prevented from receiving pension plan benefits because comparable benefits are not afforded to nonresident aliens with no U.S. source income. See House Report No. 93-807, 93rd Cong., 2nd Sess. 49, 1974-3 C.B. Supp. 284.

Nonresident alien employees are not to be considered when applying either the percentage coverage test or the nondiscriminatory coverage test of Code section 410(b)(1). Provided that coverage (always excluding the nonresident aliens with no U.S. source income) otherwise meets one of the tests of Code section 410(b)(1), the employer may elect to cover some or all of his nonresident alien employees, even if those selected for coverage are solely prohibited group members.

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Guest Harry O
US expatriates working for foreign employers may participate in foreign pension plans. These plans normally have beneficial tax treatment under local law. Unfortunately, these foreign arrangements generally do not meet the US "qualification rules". As a result, the beneficial treatment under local law is often not available to US citizens working abroad..

US citizens should think twice about participating in foreign pension plans. With some exceptions, participating in these plans can violate 409A resulting in a 20% penalty tax. Ouch.

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Can a US company permit Canadian employees who are not US citzens to participate in its retirement plan? They are working in Canada and are not US citizens.

Yes They allow retirement plan but it certainly depend on which facility you are looking for.

I worked on a defined benefit plan that was specifically designed to meet both Canadian and US law. There were some provisions that only applied to one group or the other (J&S requirements were different). They had a US approval and the Candian equivalant. Frankly it was a bit of a pain with the conversion of dollar amounts, the different distribution package requirements etc..

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The citation applies to coverage testing. Non-resident aliens are people who live in the US but have not established legal residency, work at the location of a US company, but receive no earned income from US sources because they are being paid by their foreign employer.

"Non-resident" means just that - not residing in the U.S. Aliens means non-citizens. Together, it means non-citizens not living in the U.S. i.e., Candadians living and working in Canda, but employed by a U.S. plan sponsor (considering all the controlled group rules, etc.). You can include them in a plan if you like - but you need to be cognizant of 1) the tax implications to them (slaray deferals may not be tax deferred, employer contributions may be immediately taxed to them); 2) the effect it may have on their participation in a Canadian based retirement plan (including their version of Social Security); and 3) such other wage and labor or tax laws as may apply to them as residents of Canada.

Interestingly enough, U.S. citizens living abroad (ex-pat's) are not excludeable, and must be included for certain testing purposes even if they have no U.S. source income. Same issues apply if you allow them to participate in a U.S. based plan.

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The citation applies to coverage testing. Non-resident aliens are people who live in the US but have not established legal residency, work at the location of a US company, but receive no earned income from US sources because they are being paid by their foreign employer.

"Non-resident" means just that - not residing in the U.S. Aliens means non-citizens. Together, it means non-citizens not living in the U.S. i.e., Candadians living and working in Canda, but employed by a U.S. plan sponsor (considering all the controlled group rules, etc.). You can include them in a plan if you like - but you need to be cognizant of 1) the tax implications to them (slaray deferals may not be tax deferred, employer contributions may be immediately taxed to them); 2) the effect it may have on their participation in a Canadian based retirement plan (including their version of Social Security); and 3) such other wage and labor or tax laws as may apply to them as residents of Canada.

Interestingly enough, U.S. citizens living abroad (ex-pat's) are not excludeable, and must be included for certain testing purposes even if they have no U.S. source income. Same issues apply if you allow them to participate in a U.S. based plan.

how do you deal with the fact that they do not have us source income. if for example, the canadians get paid by the canadian sub or even the american parent in canadian dollars?

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