Beemer

canadian resident in plan

13 posts in this topic

An employer has a 403(b) plan and an employer contribution plan.  A former employee and participant has been rehired.  This employee has relocated and now lives in Ontario, Canada.  She has dual citizenship, but lives and works from her home in Canada.  She is the only Canadian employee.  The plans defined compensation as W-2 compensation, but there is no non-resident alien exclusion.  She does not receive a W-2.

Am I correct in thinking that

1)  She cannot defer in the 403(b) plan or receive a contribution in the employer contribution plan as she has no W-2 compensation

2)  She should be included in participant counts as an active participant, testing, etc.

3) They could increase her compensation so that she could contribute to the Canadian RRSP.

Thanks for any replies.

 

Share this post


Link to post
Share on other sites

Includible compensation is not defined as W-2 compensation.  It is "the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to section 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service, and which precedes the taxable year by no more than five years."  Code section 403(b)(3).  A US citizen is typically subject to tax on worldwide income, subject to the section 911 exclusion.  So unless there is something screwy in the US/Canada income tax treaty, I suspect that she is subject to tax on her income, and thus that the income can be the basis for a 403(b) contribution.

Of course, whether she would want to make a 403(b) contribution might depend on Canadian law.  (If they would tax her income without any exclusion for the 403(b) contribution, she might decide that the tax benefits of a contribution would not be worth it.)  But I suspect that she should at least be offered the opportunity to participate in the 403(b), unless her compensation is for some reason entirely excluded from income for US tax purposes.

1 person likes this

Share this post


Link to post
Share on other sites

The U.S. employer reports her income on a Canadian Form T4.  Does that make a difference?

Share this post


Link to post
Share on other sites

It shouldn't.  The issue is whether the US can tax it.  How it is reported to the Canadian authorities is irrelevant.

Share this post


Link to post
Share on other sites

Even though the adoption agreement defines compensation as "W-2 wages - Compensation is defined as information required to be reported under Code Sections 6041 and 6051, and 6052 (Wages, tips and other compensation as reported on Form W-2)." ?  The definition seems to emphasize how this is reported.

Share this post


Link to post
Share on other sites

This is not a plan language issue.  The problem is the universal availability rule of 403(b)(12) for elective contributions.  Nonresident aliens can be excluded, but this person is not an alien.  I'd have real concerns if the plan definition of compensation excluded someone who had compensation that would be counted under 403(b)(3).

Share this post


Link to post
Share on other sites

She wouldn't be eligible for the employer contribution though, would she? Just the 403(b) deferral?

Share this post


Link to post
Share on other sites

She does not need to be made eligible for the employer contribution, so long as her exclusion does not cause the plan to fail 410(b) or 401(a)(4) testing.  However, I would strongly recommend amending the plan to specify the definition of compensation separately for deferrals and employer contributions.  If you have only one definition, and have to interpret that broadly in order to meet the universal availability test, she could argue that it should be interpreted equally broadly for purposes of employer contributions.

Share this post


Link to post
Share on other sites

So, if you have employees who reside outside of the U.S., you should elect 415 safe-harbor compensation in the plan document rather than W-2 wages in the adoption agreement?  Would that take care of the issue?

Share this post


Link to post
Share on other sites

The 415 safe harbor does not apply for purposes of determining compensation for 403(b) purposes.  As mentioned above, section 403(b) has its own definition of includible compensation.  26 CFR 1.415(c)-2(g)(1) provides that the 415 safe harbor does not apply for purposes of a 403(b) contract, and that instead we need to look to the definition of includible compensation.

Share this post


Link to post
Share on other sites

I understand that I need to consider universal availability.  However, the TIAA-CREF prototype for 403(b) plans has the 3 usual base compensation options and the current selection is W-2 compensation.  Are you saying that there may be an issue with using this prototype?

Share this post


Link to post
Share on other sites

Yes, there may be.  In the case of an individual employed in the US, Form W-2 compensation is a safe harbor for 415 purposes.  However, as indicated above, the regulations specifically say that the 415 safe harbor does not apply for 403(b) purposes.  Moreover, even if the 415 safe harbor applied, the actual safe harbor is not Form W-2 compensation, but 

Quote

The employee's wages, salaries, fees for professional services, and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan, to the extent that the amounts are includible in gross income (or to the extent amounts would have been received and includible in gross income but for an election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b)). 

26 CFR § 1.415(c)-2(b)(1).  In the case of an individual employed in the US, Form W-2 compensation is a safe harbor.  However, in the case of an individual employed abroad, it is not.  26 CFR § 1.415(c)-2(d)(3) provides that:

Quote

However, any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2)) are disregarded for this purpose.

26 CFR § 1.415(c)-2(g)(5) discusses the meaning of that "location of employment" rule as follows:

Quote

Amounts paid to an individual as compensation for services do not fail to be treated as compensation under paragraphs (b)(1) and (2) of this section (and are not excluded from the definition of compensation pursuant to paragraph (c)(4) of this section) merely because those amounts are not includible in the individual's gross income on account of the location of the services. Similarly, compensation for services do not fail to be treated as compensation under paragraphs (b)(1) and (2) of this section (and are not excluded from the definition of compensation pursuant to paragraph (c)(4) of this section) merely because those amounts are paid by an employer with respect to which all compensation paid to the participant by such employer is excluded from gross income. Thus, for example, the determination of whether an amount is treated as compensation under paragraph (b)(1) or (2) of this section is made without regard to the exclusions from gross income under sections 872, 893, 894, 911, 931, and 933.

So even if Form W-2 withholding does not apply, or if the Code section 911 exclusion causes the income not to be taxable at all, it would still be compensation for section 415 purposes.

So basically you've got two issues in applying the section 415 safe harbor for W-2 wages in this case:

  1. The 415 safe harbor doesn't apply for purposes of section 403(b).
  2. Even if the 415 safe harbor did apply, it does not actually permit you to exclude wages paid to US citizens employed abroad.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now