Employee Transfers to Foreign Subsidiaries

[401 Chaos]

Have a question I've never dealt with directly before and would appreciate any general thoughts or advice as to the way most plans / employers treat these situations.

Have a large client with a few large foreign subsidiaries (Canada, UK) that are all part of the Plan Sponsor's controlled group but are not, obviously, included as "Related Employers" in the 401(k) Plan. The subs instead have their own country-specific pension programs.

If a U.S. employee participating in the 401(k) Plan transfers permanently to one of these foreign subs (i.e., changes residency, begins participating in foreign sub plans), is there any reason not to treat them the same as any other terminating employee under the 401(k) Plan. That is to say, wouldn't they become entitled to a distribution upon the transfer to a foreign subsidiary that is not a "Related Employer."

The Plan document generally permits distribution upon a severance from employment with the Employer (which term includes those Related Employers that have been added to / adopted the 401(k) Plan). The term "Employer" does not include "Affiliated Employers" or those other members of the controlled group that have not signed on as Related Employers. Accordingly, it seems to me the Plan would consider any transfer to a foreign sub the same as a routine termination of employment for Plan distribution purposes.

Does this seem correct / routine. One thing that bothers me about this is that the Plan does recognize service with an Affiliated Employer as Years of Service for vesting credit. So people transferring into the U.S. from a foreign sub would get credit for their service with the foreign sub under the Plan. However, someone leaving the U.S. for a foreign sub will presumably cease participation and vesting in the 401(k) Plan and possibly forfeit a portion of their account even though they continue working for an Affiliated Employer.

I know the reason for giving service credit on the front end is a bit of a different issue but just wondering if there is any reason why somebody leaving the U.S. for an Affiliated Employer should be treated differently from a routine termination. For example, should the transferred employee continue to accrue vesting credit and not have a distribution right as long as they remain employed with the Affiliated Employer?

[QDROphile]

Why would a foreign controlled group affiliate be treated as the same employer on the front end of service and not on the back?

[401 Chaos]

QDROPhile,

That is a good question.

I did not draft the original plan and so am not sure why it was drafted that way or whether that is even an acceptable approach but the plan does use the broader Affiliated Employer category on the Years of Service issue. As a practical matter, I believe the Company has many more employees come from foreign subs to the U.S. whom they like to give credit to but relatively few people leaving the U.S. for foreign subs.

[QDROphile]

I am not asking about the drafter's mental state. I am asking why one would interpret the same law (all members of controlled group = employer) one way when awarding service credit for the employer, but then apply a different interpretation to termination of employment?

[401 Chaos]

I don't know. Perhaps it was a goof or perhaps it was intentional. All I can do is read the Plan as drafted, scratch my head and ask questions.

I think in most cases the distinction works out to the participants' advantage. The Plan is not forcing the participants transferred to a foreign sub to take their money out, it merely permits them to do so. In cases where the folks plan to move permanently, I can see where the individuals may desire to get at their accounts immediately and sail across the sea (or over the Rockies) or whatever as compared to having to leave the money in there until no longer employed with any member of the controlled group.

[masteff]

I think part of QDROphile's point, though not explicitly stated, is that you need to look not just in the plan but in the control group Regs. Despite how the plan might read, the rules say the participant doesn't have a termination of employment until completely leaving the control group.

Case in point, I was at US subsidiary of foreign oil company that sent people to US for 3 year assignments. We constantly struggled to get letters from parent company confirming termination from the parent on people who had transferred back many years before.

[401 Chaos]

Masteff,

Thanks very much. I understand your and QDRO's point on that issue. What I was hoping to get at with this post was whether or not it was absolutely required to define employer on a controlled group basis or not. My general review of the 401(k) regulations, for example, references severance from employment with the employer that maintains the Plan. It was not clear to me whether that absolutely requires a controlled group definition of the employer or if there is some flexibility with that since the Plan appears to have gone out of its way to try and distinguish between only those members of the controlled group that were participating employers in the Plan. Thanks.

[masteff]

I understand your dilemma. We had a sister company in Florida w/ 6 employees and had to fight them every year about control group status and needing numbers for testing. Unfortunately control group prevails even where "related employer" might give you some latitude.

[Guest Harry O]

There is an IRS PLR on point and I think this issue has been addressed in the preamble to the final or proposed 401(k) regs and on the rubber chicken circuit by the IRS. In other words, this issue has been beaten to death over the past 10 years or so. The answer is that a transfer to a member of the controlled group, domestic or foreign, is not a distributable event under a 401(k) plan.