Distribution from US Plan to Former Participant who is now a Canadian

[Guest ANNEBV]

Can anyone possibly help me?

A client of mine is the Canadian parent of a US subsidiary. The Canadian parent acquired the US subsidiary a few years ago. The US subsidiary has a 401(k) plan.

A participant in the US sub's plan has terminated employment at the US operation and is now employed at the Canadian parent. I do not yet know if this participant is a Canadian National or a US citizen.

Do the typcial controlled group issues apply? If so or if not, can this participant take a distribution from the US plan at this time? (i.e., are the rules any different because the parent is Canadian?)If not, when he terminates from the Canadian parent, & is eligible for distribution, how is his distribution from the US plan paid to him? In US $$?

YIKES. I feel so clueless here. Hope someone can shed some light. Perhaps this is for legal counsel who specializes in the area of international employee benefits?

[Guest Harry O]

If the employee did not have a bona fide termination of employment with the US sub before his employment by the Canadian parent (for example, he transferred employment), he cannot get a distribution from the US 401(k) plan on account of severance from service. He may be eligible if he is age 59.5 and the plan permits such a payment.

The controlled group rules apply to determine whether someone has terminated employment for purposes of the 401(k) distribution rules. I believe there may even be one or two IRS PLRs on this point.

[Guest Remysis]

I think your impulse that the normal controlled group concepts apply here is correct. If the Canadian parent is considered part of the US subs controlled group under 414(B) and therefore the same employer, the participant has not severed from the employer maintaining the plan. The controlled group rules in 1563 do make some reference to certain foreign corps being "excluded members" of the controlled group, but I don't know what that means. Consulting an international specialist may be a good idea.

You may well be better off distributing sooner rather than later. If he is not a US resident, he might still be a resident alien subject to the normal distributions from a plan. However, the longer he stays in Canada, he may give up this status, meaning the distribution would go to him as a nonresident alien -- in which case the withholding and reporting rules are much uglier. I recommend a specialist for that too.