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Foreign investments in 401(k) Plan

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A medical practice plan has apparently just hired a doctor who is a Canadian citizen. Everyone understands that since paid U.S. source income, is eligible for the 401k plan - all normal.

Now, this plan allows each participant to have individual brokerage accounts. Doctor is from Canada, and his broker is in Canada. Is there any problem with a U.S. Trust allowing him to invest in funds in Canada? Further complication - Plan specifies each Doctor is Trustee for her/his account. So technically a foreign Trustee.

Anyone run into this before? P.S. FWIW, the Trust is in fact organized in the United States, so even if this person invests in funds in Canada, it would appear that the Trust itself is under the jurisdiction of U.S. courts, and therefore it is ok? Is this "settled" law or does this require an opinion from an ERISA attorney?

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Here are two public-law constraints to meet.

1.    ERISA § 404(b) [29 U.S.C. § 1104(b)] commands “maintain[ing] the indicia of ownership of any assets of a plan [within] the jurisdiction of the district courts of the United States.”

A rule allows holding securities through intermediaries if enough control is with a sufficiently regulated and capitalized U.S. bank, insurance company, or investment adviser.

29 C.F.R. § 2550.404b-1 https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.404b-1

It is common for a U.S. bank or trust company to use non-U.S. subcustodians, depositories, and clearing agencies.

2.    Under the Internal Revenue Code of 1986, a tax-qualification condition calls for a domestic trust.

A trust, including a § 401(a) retirement plan’s trust, can be a “United States person” trust if (i) a U.S. court can exercise primary supervision over the trust’s administration; and (ii) a United States person has authority to control all substantial decisions of the trust.

26 C.F.R. § 301.7701-7 https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-F/part-301/subpart-ECFRbb5a653881cc2c0/section-301.7701-7

It’s feasible to meet that rule without undoing a participant’s power to direct investment, even if the participant is not a United States person.

If the plan’s governing documents would provide that “each Doctor is Trustee for her/his account”, the plan’s sponsor and fiduciaries might adjust those provisions regarding a participant who is not a United States person.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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