Non-resident Aliens

[Nate X]

Say a plan does not have language to exclude NON-residents with no U.S. income from a 401(k)/Profit Sharing plan.

1. Does that mean they would have the right to defer into the retirement plan & their income would be included in the ADP test? I know they would be included in coverage.

2. Would they be eligible for a profit sharing allocation based on their foreign source of income?

3. If Q1 or Q2 could be no, then what would happen if the plan failed coverage due to these NON-residents with no U.S. income?

[Ron Snyder]

I have yet to see a plan document that didn't exclude non-resident aliens with no US income. However, assuming that the plan does not exclude non-US employees, they would need to be covered. Failure to operate the plan in accordance with the terms thereof is a disqualifying event.

[JanetM]

Nate just curious, if plan doesn't exclude them do those non US employees with no US income have any compensation as defined by the plan.

You could end up covering them, but depending on definition of comp they may have $0 in income.

[Locust]

1. Yes they have the right to defer if that is what the plan says. Rule # 1: Do what the plan says. Rule #2: Be sure the plan says what it should.

However, nonresident aliens are always excluded in running the coverage tests, even if they are covered by the plan. See Code ss 410(b)(3)©.

2. See Janet M's comment.

3. Nonresident aliens are always excluded in runnng the coverage tests - they don't help and they don't hurt.

With all this, it may not be a big deal that the plan doesn't not exclude.

[Guest Harry O]

Make sure that these nonresident aliens actually work for a participating employer. Most U.S. companies do not directly employ nonresident aliens performing services outside the U.S. In most cases (with some exceptions) they work for a foreign subsidiary. The plan document probably provides that only those employers who adopt the plan will have their employees covered. I suspect the non-U.S. subsidiary would not have adopted the plan.

[Kirk Maldonado]

I had exactly the same problem.

In my case, the plan document was the source of source of the problem because it required coverage of all employees, and there was no exclusion for non-resident aliens with no US source income. Thus, there was a failure to operate the plan in accordance with its terms (becuase the plan wasn't extended to non-resident aliens).

However, I had two in-depth discussions with IRS officials about my case, and they were both very accomodating. Part of that may have been due to the fact that in because in my client's situation the cost of trying to fix the problem would be much more than the cost of disqualification. Thus, the employer would rather opt for disqualification than to fix the plan.

My recommendation is call the IRS to discuss your case with them ahead of time, and then submit it to them via EPCRS.