Candaian EE in a US ESOP?

[lexi]

I have a parent C corp that incorporated a subsidiary in Delaware. The sub is physically located in Canada, employs Canadians and all work is performed in Canada. The parent wants the Canadian EE to participate in the US ESOP.

1) Is it possible to integrate foreign EE into a US ESOP (especially Canadian EE who have Canadian-mandated pension plans); and

2) If yes, is there a resource out there that walks you through how one integrates the foreign EE (e.g., 415 limits, conversion from Candian dollars to USD)?

Does anyone have any suggestions?

[Guest DDahl]

Lexi - did you ever find answers to your questions? I would be interested in any thoughts you may have.

[PensionPro]

You may enjoy this PLR:

Private Letter Ruling 200205050

(8 Nov 2001)

UIL: 401.00-00

Date: November 8, 2001

Refer Reply To: T:EP:RA:TI

Attn: * * *

LEGEND:

Company A = * * *

Company B = * * *

State D = * * *

Country C = * * *

Plan X = * * *

Dear * * *

This is in response to a letter dated August 22, 2000, as supplemented by additional correspondence dated January 17, 2001, filed on your behalf by your authorized representative regarding a ruling under sections 401(a) and 4975(e)(7) of the Internal Revenue Code (the "Code"). The following facts and representations were submitted in support of your request.

Company A is a domestic closely held C corporation incorporated under the laws of State D. Company A wholly owns several subsidiaries, including Company B, a foreign corporation organized under the laws of Country C. Company B has two employees ("Employees") who are US citizens working for Company B and who receive compensation that is considered "foreign earned income" under section 911 of the Internal Revenue Code (the "Code"). Company A maintains Plan X, an ESOP qualified under sections 401(a) and 4975(e)(7) for eligible employees of Company A and its subsidiaries. These Employees may participate in Plan X pursuant to the plan's eligibility provisions. Plan X invests primarily in employer securities as defined under section 409(1)(2).

Section 2 of Plan X defines "Employer" as Company A and any Affiliate which elects to cover its employees under the plan. "Affiliate" is defined as Company A and any other corporation which is a member of a controlled group of corporations within the meaning of Code section 414(b) of which Company A is also a member, and other entities required to be aggregated under sections 414©, 414(m), and 414(o). This section of Plan X also defines "participant" generally to mean a common law employee of an Employer who has met certain eligibility requirements as provided in the plan. Section 2 defines "compensation" as the total cash compensation paid to an Employee by Company A or an Affiliate during the Plan year excluding any amount in excess of $160,000 (as adjusted for COLAs under section 401(a)(17)).

Based on the above facts and representations, you request a ruling that during the time that the Employees are employed by Company B and receiving "foreign earned income" as defined under Code section 911, the Employees may participate in Plan X without adversely affecting the qualified status of the plan and its underlying trust under sections 401(a), 501(a) and 4975(e)(7).

The Employee Plans Technical office does not ordinarily issue rulings on matters involving plan qualification. However, since we have determined that the taxpayer has met the criteria set forth in Section 6.03 of Rev. Proc. 2001-4, 2001-1 I.R.B. 121, our office has decided to provide a ruling in response to the taxpayer's request.

Code section 414(b) provides that for purposes of sections 401, 408(k), 408(p), 410, 411, 415 and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)© are treated as employed by a single employer.

Section 1.414(b) of the federal Income Tax Regulations (the "regulations") provides that for purposes of Code section 414(b), the term "members of a controlled group" means two or more corporations connected through stock ownership described in section 1563(a)(1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the meaning of section 1563(b).

Code section 1563(a) defines a parent-subsidiary controlled group as any group of one or more chains of corporations connected through stock ownership with a common parent corporation if certain stock ownership tests involving, at least 80 percent of the total value of shares of all classes, in relation to the parent and other corporations, are satisfied.

Code section 1563(b)(2)© excludes from the definition of a "component member of a controlled group" a foreign corporation subject to tax under section 881 for such taxable year.

Section 1.415-2(d)(2) of the regulations provides that for purposes of paragraph (d)(2)(i), which describes compensation for testing purposes under Code section 415 as including wages and salary, foreign earned income under section 911(b) (whether or not excludable under section 911) is also included.

As indicated above, under Code section 1563(b), a foreign corporation subject to tax under section 881 is not treated as a member of a controlled group for purposes of section 1563. This exclusion, however, does not apply for purposes of section 414(b). Under section 414(b), any corporation that is a member of a parent-subsidiary group is aggregated, whether or not the corporation is considered a component member of a controlled group under section 1563(b). Applying these principles, Company A and Company B are considered to be members of a controlled group for purposes of 414(b). We further note that there exists a controlled group of corporations for purposes of section 409(l). See 1.46- 8(b)(4)(i) of the regulations. Accordingly, we rule that the Employees' mere participation in Plan X and receipt of foreign earned income under section 911 while employed with Company B will not adversely affect the qualified status of Plan X under sections 401(a), 501(a), and 4975(e)(7). This ruling is based on the assumption that Plan X remains otherwise qualified under Code sections 401(a), 409 and 4975(e)(7) and its related trust is tax exempt under section 501(a) at all relevant times.

This ruling is directed only to the taxpayer who requested it. Code section 6110(k)(3) provides that it may not be used or cited by others as precedent.

A copy of this ruling has been sent to your authorized representative in accordance with a power of attorney on file with this office. Should you have any concerns regarding this letter, please contact * * * .

Sincerely yours,

John Swieca, Manager

Employee Technical Group 1

Tax Exempt and Government Entities

Division

cc:

Enclosures:

Deleted copy of ruling

Notice 437

[ERISAnut]

The foundation is already there within the code itself. The PLR, though only applicable to the taxpayer requesting it, seems to recite certain fundamentals that have been in operation for years.

Let's look at it this way:

Certain employees MAY be excluded from the plan by class without having an adverse impact on coverage. Among them are employees who are 1) Non US residents; and 2) Not US Citizens and 3) Not receiving compensation from a US source (meaning working outside of the US).

Example, if a Canadian citizen working in North Dakota, but continues to live in Canada, he is not a safe exclusion since he is receiving income from a US Source (company located in ND).

Your case is where the employee: 1) Is not a Resident; and 2) Is not a US Citizen; and 3) Is not working inside the US (but merely for a US subsidiary.

There is nothing in the code precluding the inclusion of the employees for the US subsidiary within the plan. A prototype document may be used while 1) No electing to exclude Non-Resident Aliens and 2) Having the Subsidiary Sign on as a Co-Sponsor to the plan.

As ridiculous and impractical as this sounds; it is business as usual from there. There is no integration with a plan under the Canadian Tax Rules as it is not recognized as a US plan (i.e. No Testing the plans for nondiscrimination or other rules).

There are issues that come into play when those non-resident aliens actually receive distributions from the US plan. Then again, there a process in place for that.

My question would be what the employer stands to gain from this.

[Guest Sieve]

I'd agree with ERISAnut. Nothing prevents inclusion of non-resident aliens in a plan. I'd be careful, however--I would not remove the plan's non-resident alien exclusion, but would simply word it such that it was not applicable to the extent necessary to cover those in the Candian sub which adopts the plan (at least at this time).

And, on as practical level, in response to your question about whose $ would be used, the plan would have to specify that it was Canadian $ or else all benefits & contributions would be in US $. Nut, you might want to clarify via an amendment.

[GBurns]

In the PLR the subsidiary company is not a US company in anyway. It is a foreign corporation incorporated in a foreign country operating in that foreign company using US citizens as employees. Whereas in the OP, it is a US incorporated company operating in a foreign company using Non-US citizens. That seems like quite a distinguishing factor.

[RLL]

The big issue here is complying with Canadian law, which is required if the Canadian employees are to be covered. I haven't looked at this issue for many years, but the Canadian laws at that time were somewhat difficult when investing retirement plan assets in employer stock, particularly if the stock was not publicly traded. But those laws may have been changed.