Foreign Company Wants to Establish QRP

[Guest WantsToLearn]

A foreign company wants to establish a US QRP for it's employees. Is there any circumstances under which this is allowed. I looked at the definition of Wages, and the Definition of Employer under IRC 3401, but I am still not sure.

[Guest mjb]

what are the facts? Generally a foreign corp can establish a qualified plan for wages paid to US employees if the employer establishes a domestic (US) trust and the plan meets the requirements of IRC 401(a). Whether the contributions are deductible is a separate issue.

[Guest WantsToLearn]

Thanks MJB.

I am doing the research for my boss, and I was not sure of the questions I needed to ask her.

She explained that the company does intend to set up a plan that qualifies under IRC 401(a). The company is located in the Caribbean, and appears to have no affiliation to the US either ownership of owing any subsidiaries. It just so happens that they employee employees who are US citizens and they will be withholding US taxes from the employees’ paychecks.

She told me to look at

• Internal Revenue Code (IRC) 3401 (d) (2)
  
• 3401 (a) (5) and 3401 (8) (A) (ii)
  
• IRC 861(a)(3)©(i)
  

Which is what she was looking at before she left.

I am thinking that if the employees are paying US taxes and would therefore need to file a US return, they would be eligible to participate in a 401(a) plan- but I am bery confuled and tend to think otherwise when I look at those code sections. However, it seems that if the corporation does not file a US return, deduction for contributions could not be a consideration?

TKs

[Guest mjb]

US citizens are subject to taxation on world wide income regardless of whether they earn it in the US. A foreign employer can establish a 401(a) plan for its US employees by establishing a domestic trust in the US. See IRC 401(a) first sentence. The plan will be subject to US laws including ERISA. Deductions for the contributions are governed by IRC 404(a). If the employer does not pay US taxes there will be no deduction for contributions. Paying US taxes is not a requirment for estabishing a qualified plan.

[Guest WantsToLearn]

Thank you

[Flyboyjohn]

The opinions expressed in this 2006 post seem to conclude that:

1. A foreign company (no US presence) that employs US citizens in the foreign country can establish a 401a qualified plan for the benefit of it's US citizen employees (that is, the plan sponsor is not required to have a US presence), so long as

2. The plan trust is a domestic trust (which probably only means that the Trustee is a US citizen or institution).

My questions:

1. Has anything changed in this area since 2006 or does anyone have differing opinions?

2. If we use a US institutional Trustee (say for example Capital Bank & Trust)have we met the "domestic trust" requirement?

3. If the US citizen employees' earned income is fully sheltered from US tax by the foreign income exclusion it would seem they should only make Roth deferrals and probably elect to convert any employer contributions to Roth?

Thanks