Foreign employees and 401(k) participation

[Guest Amy]

I have several British employees who are on H1B Visas to work in the US. If they can participate in our 401(k) plan, can they:

a) rollover their money if they return to Britain to work? If so, to what?

b) take advantage of the tax savings upon withdrawal at retirement even if they live in the UK? Would they have to live in the US to use the 401(k) earnings at retirement?

Any other experiences with international employees and 401(k)'s?

Thank you.

[LCARUSI]

If the employee returns to England, can he or she receive a distribution from the Plan? Anotherwords, has the employee separated from service from the controlled group?

[Guest SPerson]

Amy;

I just sold a 401k to a company with many English employees. Most are here on VISA's. It is my understanding (through my discussions with the IRS and Department of Labor) that as long as they claim W-2 earnings they can participate in the 401k Plan. If they leave the US and want to take money out they should wait a year. Because they would be earning $0.00 in that year and would be taxed at a lower rate. I believe there is a 30% tax withholding for 401k distributions outside the US. They can also keep their money in the plan until retirement. Hope this helps. Steven

[Guest ESOPwizard]

If the employee returns to England but remains with the same "employer", taking into account IRC 414(B) and ©, the 401(k) plan may not make a distribution to the employee unless the employee qualifies for an in-service distribution.

[Guest Harry O]

A couple of observations:

1. ESOP Wizard is certainly correct - if the U.K. folks expatriate back to the U.K. to work for a related employer (which is the typical scenario), the IRS says that there has been no "spearation from service" and hence no 401(k) distributable event. I seem to recall a recent PLR to this effect . . .

2. No, the U.K. folks cannot roll their 401(k) accounts into some type of British equivalent to an IRA. There may be strategies to minimize U.K. taxes but you should contact your U.K. counterparts for more info. I suspect if you have U.K. employees here in the States, there is someone back in the U.K. who can give you the help you need on U.K. taxes . . .

3. The U.K. and the U.S. have an income tax treaty which addresses the tax treatment of "pensions." YOU MUST LOOK AT THIS TREATY CAREFULLY since it will not only provide guidance on whether your U.K. friends have to pay U.S. taxes but it also will tell you whether you have a U.S. withholding obligation. You will also need to look at PLRs on this issue since many treaties only exempt "pensions" from U.S. taxation if payments are made periodically. The PLRs may give some relief on this but it again depends on the treaty in question . . .

4. There is no need for a nonresident alien to have W-2 compensation to participate in a U.S. qualified plan. Anyone anywhere in the world (assuming they are an "employee") can participate in a U.S. qualified plan. However, it usually doesn't make sense to do so because the employee may be subject to U.S. tax on a portion of his distribution even if he never set foot in the U.S. and certain foreign countries may have ERISA-like rules that can't be satisified by U.S. plans.

5. This is not a "do-it-yourself" area of pension law. Get some good help from experts or you could have some unhappy British expats . . .