Employer Unwittingly Includes Foreign Nationals in 401(k) Plan

[Christine Roberts]

Employer adopted a prototype 401(k) plan and did not check the

right box on the adoption agreement so as to exclude from participation

foreign nationals with no US-source income. The employer was unaware that a subsidiary it had recently acquired employs about 4 or 5 French citizens residing in France.

Would it be possible to justify excluding the French nationals if, for instance, the plan defined compensation as W-2 compensation, and the adopting employer did not provide W-2 compensation to the French nationals?

If the employer were ultimately required to retroactively include the French citizens in the plan by contributing the equivalent of average salary deferrals and matching contributions on their behalf, exactly how would this be accomplished?

Where would the money go and how would it be reported? Its my understanding

that, absent a tax treaty provision to the contrary, the money would be

taxed to the French citizens upon contribution to the Plan, and upon

withdrawal, as well.

[mbozek]

Why not amend the plan back to the beginning of 2004 to exclude any foreign nationals. Generally a qualfied plan can be amended during the year back to the beginning of the plan year. Check the closing agreement to see what the provisions are regarding benefits for foreign nationals and if there is a board resolution excluding these employees. Usually foreign nationals are excluded from US benefit plans and are covered by a plan in their country.

[Christine Roberts]

This is a good suggestion - you don't suppose there is any argument, on behalf of the foreign nationals, that their right to participate in the 401(k) has essentially "vested" and cannot be cut back because they theoretically were eligible to defer under the acquiring company's plan, as soon as the acquisition closed?

[mbozek]

I dont think these people even know about ERISA and how to enforce their rights. The DOL has no interst in enforcing their claims. Also many foreign countries have currency laws which prevent their citizens from investing their currency abroad to convert it into into us$ so excluding them will prevent the sponsor from violating foreign laws.

[k man]

you could do what mbozek suggests but i know of circumstances where the IRS attempted to force an employer to make a substantial contribution on behalf of foreign migrants that were the employer incorrectly failed to exclude.

[WDIK]

Was the IRS successful? In what way are the circumstances you mention the same as those described by Christine? In what way might the be different?

[mbozek]

I am curious as to how foreign nationals would make salary reduction contributions to a US trust in their foreign currency which may require violation of foreign currency laws by their employer. The foreign employer can refuse to accept the contributions.

[k man]

the attorney representing the plan threatened the irs that the employer would disqualify the plan if they had to make the contribution. i believe the irs backed down at that point.

[rcline46]

If the FNs do not have a W-2 then they cannot defer. The only negative is that they will count in all testing as zeros - maybe.

Jim Holland's position that no income means not in 401k testing, not even as zero seems to override so they would not even be zero's!

It looks like Mr. Holland just eliminated the need for the non-resident alien no source of US income problem.

You also have the 410 merger / acquisition period to fix the document. I don't see a problem here.

[Harwood]

Seems like Christine's and K man's situations are entirely different - French citizens living in France as opposed to foreign migrants - resident aliens working in the U.S.

[WDIK]

Harwood:

Your direct approach is much better than my attempt at subtlety