Non-U.S. Citizens in 401(k) Plan

[Guest Kelly Igel]

Say a U.S. Employer employs Canadian citizens who are earning U.S. income and are participating in 401(k) plan. A Canadian employee is transferred overseas but is still earning U.S. income. Can he/she continue to participate in Plan?

Second, say that the Canadian employee is transferred back to Canada and is still employed with Employer, but is no longer earning U.S. income, and wants to transfer his/her account to a Canadian retirement plan. Is that possible?

Obviously these are probably issues to be referred to their client's legal counsel, but a first guess may be that the account (in the second case) cannot be distributed until a distributable event occurs.

[Guest UKH]

If the participant is still earning U.S. income I do not see any problem why he/she can not continue participation in the Plan. After all he/she still has to file U.S. taxes at the end of the year.

I believe he/she can not transfer the account to a Canadian retirement Plan since no distributable event has taken place.

[Guest Laura]

With respect to issue number 1, pay attention section 415 which imposes a dollar cap on contributions relative to compensation. the participant at issue must have 415 comp during a plan year in order to contribute (and/or receive employer contributions). 415 comp includes w-2 wages and income excluded from ordinary income under section 911 (relating to non-us income).

i don't believe that amounts transfered from the us pension system to the canadian system are "portable" meaning a participant can't roll it over from one system to the other. plus, as you wrote, here there is no distributable event. the participant can however leave the $ in the plan, thus preserving its tax deferred status. in other words, the participant doesn't need to effect a rollover to the canadian system in order to accomplish the goal of keeping the $ tax deferred. another issue to keep in mind - i assume that the trust is domiciled in the us. if the -ee is now living in canada and the trust disburses a check to him or her in canada, you may have an increased withholding obligation. you need to look at the treaty between us and canada and section 3405 of the internal revenue code for these special rules.

[IRC401]

Someone employed overseas will be subject to the tax laws of the nation in which he is working. That nation may tax 401(k) contributions, in which case the individual would owe tax overseas when the 401(k) contributions go in and tax in the US when the contributions are distributed. It is not necessarily advantageous for the person overseas to make 401(k) contributions.

As a general rule, in order to get good advice you need an employee benefits specialist working in conjunction with an expatriate tax specialist.

PS: Don't forget to make certain that the 401(k) plan permits the overseas employee to participate.

[Guest Harry O]

I'm not sure how a Canadian citizen employed outside the US continues to earn "US income." The employee may be on a US payroll but that doesn't make the pay US source unless the Canadian has a US green card. Otherwise the pay is foreign source income paid to a US nonresident and is not included in US gross income. This is obviously a bad result since the employee's section 415 limit will be zero (at least for 2001).

My recollection is that section 911 only applies to US citizens and resident aliens. Again, your Canadian must have a green card to be a US resident eligible for section 911.

[Guest Harry O]

Point of clarification . . .

Wages earned outside the US by all employees are foreign source income but this income is only taxable in the US for US citizens and resident aliens. The key issue under section 415 is not whether the income is US source or foreign source but whether it is includible in US gross income.

[Bob R]

I've always wondered what would happen if a plan DIDN'T exclude non-resident aliens with no U.S. source income. In other words, would these people still be excluded because they had no 415 compensation.

Interestingly, in a conference call today with various IRS people, a comment was made by one well known individual at the IRS (I don't want to use names to protect the innocent) that the Service has treated the non-U.S. source income as 415 compensation even though it is technically excluded. I had never heard that before and was curious if anyone else had heard of this.

It still doesn't solve the international tax issues - i.e., the foreign country could tax amounts contributed to the plan.

[Guest Meg H]

Can anyone comment on the following - U.S. citizen who participates in company 401(k) plan transfers to a Canadian location of the same company and becomes a naturalized citizen of Canada. Participant maintains that earnings on his U.S. 401(k) plan balance (which has not been distributed due to lack of distributable event and can not be rolled over to the RRSP the participant currently contributes to) are considered taxable in Canada.

Does anyone know if this is correct and/or what are some good sources of information on this issue? I attempted to find the information on the Revenue Canada site and was unsuccessful. :confused:

[Moe Howard]

When the Canadian was working in the foreign country ... was she still employed by the plan's sponsor ? If yes: then of course she will remain an active participant in the plan.

When she is later transferred to Canada ... is she still employed by the plan's sponsor ? If yes: then she will remain an active participant in the plan. However, if she becomes an employee of a Canadian corporation that is a subsidiary of her former US employer (the plan's sponsor)... then she will not be a participant in her former US employer's plan.

And now your last question: Does the IRS allow tax free rollovers of US based retirement plans to Canadian based retirement plans? I have no idea.