Can Foreign Employees Join Qualified DB Plan?

[Guest HarveyC]

Can a qualified DB plan allow foreign employees of foreign divisions (e.g. Mexico) to participate? Also, any reference to the code and/or regs would be great.

[Guest HarveyC]

From viewing other threads, seems like the answer to my question is no. 415 compensation includes wages, etc, that can be includible in gross income. However, 872(a) definition of gross income excludes income of nonresident aliens (foreign nationals) earned outside the U.S. Any disagreement?

[mbozek]

The answer is yes but is more complicated than that. A US pension plan can include foreign workers but their benefits will be paid in us dollars. Penson payments from a qualified plan are considered US source income because the trust is a domestic trust under us tax laws so the foreign workers will have us income tax unless there is a treaty with the foreign country that exempts such nationals from us taxation.

Under Section 4 of ERISA a us employer can estabish a pension plan for foreign workers with no us source income which is exempt for regulation under ERISA. A pension plan established in a foreign country would not be subject to us income tax. Also many foreign countries have currency restrictions which prevent payment of benefits in non national currency, eg. us dollars or transfer of national currency into us dollars.

International pension planning is very complicated because it involves the local laws of the country where the workers reside. Most of the large consulting/ Accounting firms have special units that advise clients on maintaining such plans.

[Guest HarveyC]

Thanks, mjb. Could you refer me to the cite that states that an existing U.S. pension plan for domestic employees can also include foreign workers residing in foreign countries?

[mbozek]

Since IRC 410(B)(2) permits a plan to exclude non resident aliens with no us source income from participation, an employer could choose to include these persons as participants.

[IRC401]

Nonresident aliens with no US source income may participate in a DB plan because there is nothing in the law prohibiting them from participating. I have been told that many US multinational corporations do, in fact, have plans covering such employees.

There is an issue as to whether they have 415 comp. One consultant told me that he questioned the validity of the IRS regs. Keep in mind that you may not need 415 comp. if the accrued benefit is less than $10,000 per year.

The tax rules regarding distributions are extraordinarily complicated, and if you are using an outside service, they probably won't know how to deal with the payments. Expect to spend time trying to interpret tax treaties.

Including non-resident aliens with no US income is not a good plan design strategy for those looking to use low cost service providers.