415 Limit

[John A]

If a defined contribution participant has no U.S. source income, is the 415 limit for that participant zero? If that is the case, is there any way for a participant with no U.S. source income to ever have money in a U.S. qualified D.C. plan? If not, why is it even possible to include "nonresident aliens with no U.S. source income" in a plan - what would be the purpose of including this category?

[Guest Harry O]

Depends which definition of compensation you use for section 415 compensation. For example, you can use W-2 compensation without regard to the "nature or location of the employment". Thus, foreign source income that would be reportable on a W-2 but for the fact that it is not included in a NRA's gross income would be eligible section 415 compensation.

[John A]

Thanks, Harry O! Can you give me an example of income that would constitute "foreign source income that would be reportable on a W-2 but for the fact that it is not included in a NRA's gross income?"

Also, would a nonresident alien with no U.S. source income but a nonzero 415 limit be able to contribute pre-tax deferrals to a 401(k) plan? Or would they be limited to after-tax contributions and profit sharing contributions?

[Guest Harry O]

Nonresident alien who works for a US corporation outside the US -- compensation would be reportable (technically) but is not taxable to the employee because he is a NRA who performed no services in the US.

[Guest carsca]

Harry O,

I'm not sure I follow your previous post.

What would you say about an employee who works for UK Subco, but participates in the US Parent's 401(k) plan? My read of Treas. Reg. 1.415-2(d)(2), flush language, leads me to believe that the employee's "foreign source income" (i.e., his income earned while performing services for UKSubco) would be counted for 415 purposes.

Do you agree?

Thanks.

(Follow-up point: Assuming you agree with the above, would your answer change if the employee is not a US citizen? I don't see why it would, but I have a feeling you might think otherwise. Thanks again.)

[Guest Harry O]

Your plan seems to be using the "traditional" definition of section 415 compensation defined in Reg. 1.415-2(d). Reg. 1.415-2(d)(i) requires amounts to be included in gross income to count as section 415 compensation. The language you cite creates a special exception for foreign earned income otherwise excluded from gross income of a US citizen or resident by virtue of section 911. Thus, if your hypothetical employee is a US citizen or resident, this foreign source income would count under section 415 even though it is not included in gross income.

If your hypothetical employee is a nonresident alien performing services outside the US, then this definition of section 415 compensation would NOT include pay for his non-US services. This is because compensation for services performed outside the US by a nonresident alien is not included in such person's US gross income.

[Guest carsca]

Thanks, Harry O.

In terms of covering the employee in my example above, I'm wondering whether there is an advantage if my plan refers to compensation as "Form W-2 compensation without regard to the nature or location of the employment" rather than "compensation as defined under Reg. 1.415-2(d)."

It appears to me that one advantage to using the W-2 defintion is that if my plan defines compensation as Reg. 1.415-2(d) amounts, the employee, pursuant to Section 911, must be a US citizen and he must be resident in the foreign locale for a certain period of time. As a result, it's possible that an employee would end up with $0 415 comensation if he is merely passing through the foreign jurisdiction for a limited period of time (e.g. six months).

On the other hand, if the plan includes W-2 compensation, that definition should automatically pick up the employee's foreign compensation even if the employee is only employed by the foreign affiliate for a limited period of time.

Am I on the right track?

[Guest Harry O]

No. If a US citizen doesn't qualify for the section 911 exclusion, all of his earnings, regardless of where earned, are included in gross income (remember that a US citizen is generally taxed on his worldwide income wherever earned). Thus, there is no difference here between the traditional 415 compensation definition and W-2 earnings.

[Guest carsca]

OK, I see what you are saying:

(1) Essentially, an employee transferred to the UK will have $0 in 415 compensation if he is a nonresident alien.

(2) If an employee is a nonresident US citizen, he will have 415 compensation whether the plan defines compensation under Sec. 415 or undera modified W-2 definition.

Now do I have it?

Thanks.