Foreign 401(k) Participants

[Guest CHRISTA]

Here's a scenario I need some guidance on:

A participant in a 401(k) Plan is here in the USA on a work visa. The work visa expires and they must return home. Does the participant have to take their money out of the plan? What if they have $5,000.00+ in their account can they leave it even though they're returning home? Can they put it into an IRA here in the USA? What does the US Government say about all this????

[Guest]

If the employee will work for the employer back in his home country, he is not eligible to withdraw his pre-tax 401(k) deferrals (he hasn't separated from service). If he is really terminating employment, he can receive his money and he can utilize an IRA rollover. If he does not roll over the money, the answer gets complicated. You need to consult any applicable tax treaties to determine taxability and to figure out the appropriate withholding rate. This is a complicated area so get some help from somebody experienced with international tax issues.

[Guest TerminatedPPA]

What country is involved? For instance, Canadian citizens must take a cash payment, they will receive a tax credit in Canada for the tax paid in the US and then receive a tax notice equal to 50% of the distribution. Each country is different, but the ability to roll to an IRA should be available. It will just prolong adverse tax consequences in most cases.

[Guest]

I am not aware of any requirement that Canadian residents have to receive a cash payment.

In addition, there will not necessarily be adverse tax consequences. It is not unusual for there to be no US tax on the distribution as a result of a tax treaty. Moreover, some foreign countries exempt pension income from tax entirely.

I can only reiterate that individuals in this situation should get good tax advice. There are pitfalls and opportunities. Plan administrators should also get good advice so that they withhold the proper US taxes. It is a good bet that a nonresident who was underwithheld will not voluntarily pay the shortfall! That is when the IRS comes looking for the plan administrator.