Increasing participation of foreign nationals in 401(k) plans

[Guest llerner]

A corporation with over 100 employees is comprised of 90% foreign nationals (mostly from India) working in USA on 3 or 6 year visas. The employer would like to implement a 401(k)(all have benefits)however; employees responded that they did not want one. The person in charge feels that they are confused and wants to know the best way to convince them that this is not an IRS scheme to take their funds. Many are upset that they have to pay into social security but it will not be returned so they'd like to emphasize the portability aspect and that it is their money. We're doing the logical but wondering if anyone has: 1) Direct experience so that we don't have to reinvent the wheel 2) Any culturally sensitive advice?

The owner would like a plan implemented January 1 and it is already December!! Thanks so much. Appreciate any feedback.

[Guest Rsircar]

There are couple of factors that play into this situation.

1) The foreign nationals have to pay US taxes including social security taxes, however they will not receive a cent of benefits, nor is the tax refundable when they leave the country after the expiration of their visas. This is unfair in their minds, and causes a mistrust of the tax laws.

2) The problem that you are facing with contract workers, is that they will have to pay US income taxes including pre-mature distribution penalty at the time they terminate and leave the country. Roll over IRA is not a viable option. In order to maintain an account in USA while they are in India, they will need special permission from the Reserve Bank of India, which will invite the attention of Indian income tax authorities. So, from their perspective there is no clear tax advantage, except to delay paying the taxes until they leave. Also a lumpsum distribution will most likely put them at a higher tax bracket. Again they will be paying taxes, without getting any benefit from that unlike US citizens. Keep in mind, they will have to settle the tax bill prior to departure.

3) How do I know about this? I have dealt with this situation.

[LCARUSI]

Based on Rsircar's comments, it sounds like a 401(k) plan might not be such a good idea for these employees.

I have one follow up question for Rsircar:

Can these employees take a distribution from the 401(k) Plan when they return to India? I'm thinking that if they are still employed (in India) in the same controlled group of companies, have they in fact separated from service? Is there a distributable event?

[Guest Rsircar]

This is the answer to the last question from LCARUSI.

Generally these people are here on a H1 visa. They work for a US corporation for a stated number of years, until the H1 visa expires. They are required to leave USA. A t that time there is a termination of employment. When they return back they are no longer employed by that US corporation.

If the US corporation has a branch in India and they manage to get a job there, they are in a different category for tax purpose both under IRS code and Indian tax code.

When the employment contract with the US corporation in USA terminates, there is a distributable event.

Indian tax laws do not recognize 401(k) plans. However recently the insurance and financial business sectors have been opened up for foreign investors. Hopefully in the near future there will be some positive changes to the law, especially a reciprocal tax treaty with US similar to what many European countries have with US.

[Guest llerner]

Thank you you both for your input. I was able to bring this up with the key person today. Interestingly enough, she wanted to argue the point because it is actually the American employees (7 out 120) that are clamoring for the 401(k) plan and they seem (or want to believe)that since the corporation has only been in place 6 years and they have a sponsorship for green card program, none may return to India.

Although there is a possibility that these employees will gain resident status, the implementation of a 401(k) plan based on the assumption that these employees will not return to India does not seem reasonable. They are here on visa that are specifically states a time frame. The owner is requiring a survey of employees in order to implement a

401(k) plan. Since a 401(K) plan may pose a greater tax liability than regular savings,this must be communicated to the employees. The co rep believes there will be a way to overcome the tax obstacles. At this point, I contacted the provider and they are checking with their attorneys.

Has anyone implemented a plan under these circumstances? It would seem to defeat the purpose of the 401(k) plan unless some great new reciprocal agreement regarding taxes happens over night between the US and India.

[LCARUSI]

Two suggestions:

1) Put in a regular 401(k) Plan. Participation is of course voluntary and if the citizens of India choose not to participate, that's their choice. (You might have a testing problem if too many of them are HCEs.)

2) How about a plan which allows both pre-tax AND after-tax contributions?

The employees who anticipate a return to India could contribute on an after-tax basis and receive the matching contribution (if there is one). Their tax liability would be smaller when they take a distribution.

The US citizens could contribute on a pre-tax basis.

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I would recommend #1. Administration of a plan with after-tax contributions is more difficult and many service providers will not support it. Also, why design a benefit program for employees who are for all intents and purposes temporary employees?

[Guest icaps]

Why is a roll over into an IRA not a viable option for foreign nationals? As far as I know is the maintaining of an retirement account not restricted to US citizens (that would exclude all permanent residents aliens) or to Permanent Residents (that would exclude US citizens living in foreign countries).

Isn't it like with regular bank accounts? You can maintain one even if you are a foreign national living in a foreign country. However, when you take money out (or start withdrawing from your retirement account) there will be US taxes withheld and you have to file a US non-resident tax return. If you have to pay additionally taxes in the foreign country depends then on the law of this country and whether there are any double tax treaties.

Or do I miss something?

[LCARUSI]

ICAPS -

If you were going to work in a foreign country for two years and then return here, would you want to leave an IRA (or that country's equivalent) behind in that country?

Then for the rest of your career here or until you took a distribution, you would have that investment "out there" in a foreign country subject to strange tax laws.

I think those employees are smart to say "no thanks" to a 401(k) and they should ask for the match or company contribution in cash.

[Guest icaps]

It probably depends on the personal circumstances: A german friend tells me he loves his US account. He says he can access his US account easyly via internet, he can use the online discount broker for investing, he gets higher interest rate and the credit card that comes with it can be used all over the world; the tax rate is lower in the US and a tax treaty protects him from double taxation. A US account for foreigners probably makes sense if you want to keep part of your portofolio in US currency and if you want invest in the US market.