Change of employment to foreign plan sponsor

[John A]

A Canadian company purchases a U.S. company that has a 401(k) plan. The Canadian Company becomes the plan sponsor.

One of the employees participating in the U.S. 401(k) plan is a Canadian citizen living in the U.S. (resident alien).

If that employee leaves the U.S. company to live in Canada and work for the Canadian parent company, what happens?

Can a distribution be made to the participant?

Does service with the Canadian parent company (and plan sponsor) count towards vesting service in the U.S. plan?

Can the plan document specify the answers to these questions (is there a choice)?

[Guest Harry O]

"Can a distribution be made to the participant?"

No. The employee has not terminated employment with the "employer." The "employer" is the controlled group of corporations owned by the Canadian parent that owns the U.S. subsidiary.

"Does service with the Canadian parent company (and plan sponsor) count towards vesting service in the U.S. plan?"

Yes. All service with any member of the controlled group counts for purposes of vesting under section 411.

"Can the plan document specify the answers to these questions (is there a choice)?"

The plan document probably does not explicitly address your situation. But it probably defines "Employer" or "Company" by referencing the controlled group rules of section 414(B) and ©. Once you understand that the "Employer" includes all companies in the controlled group, you should get to the right answer under the terms of the plan.

[John A]

Thanks, Harry.

Is it also true then that, for U.S. qualified plan purposes, there is really no difference between the plan sponsor being a U.S. company and the plan sponsor being a non-U.S. company?

Or are there other issues that are affected by the plan sponsor being a non-U.S. company?

[Guest Meg H]

Just as an FYI - if your Canadian employee returns to Canada and begins paying Canadian income taxes, any earnings in his U.S. 401(k) plan may be considered taxable in Canada.