Canadian Employee Working in US

[Guest Denise S. Prince]

Can you tell me what the law states for investing into our 401K plan for a

Canadian employee here on work visa?

He is concerned about accessibility.

[Alf]

I don't know if anything that prevents him from participating. If he is a resident alien (which I assume he is), your plan probably makes him eligible to participate (you may already know this).

As far as accessibility, the normal 401(k) distribution restrictions would apply to him. Therefore, depending on the terms of the plan, he probably will not be able to get distributions of his elective contributions until the plan terminates, he separates from service, dies, becomes disabled, etc.

[IRC401]

Keep in mind that transferring to a related (IRC 414(B)) employer in Canada is NOT a separation from service for purposes of taking a distribution of 401(k) money.

[Guest PeterGulia]

If the 401(k) plan is a salary-reduction-only plan, an employee who intends to remain a Canada resident should consider whether it is desirable to contribute to the plan.

The USA-Canada income tax treaty's definition of "pension" includes a broad range of retirement arrangements. The treaty defines "pension" to include any payment under a "superannuation, pension or retirement plan." Thus, a lump sum distribution obtains pension treatment, without regard to the age or service of the participant. Finally, the treaty's savings clause does not apply to the entire pension article.

Under the treaty, a pension distribution is taxable in BOTH Canada and the USA. However, the income tax in the nation in which the distributee does not reside is limited to a maximum rate of 15 percent. If the distributee is a resident of Canada, Canada may tax the retirement plan distribution without limit, except that the amount included in income must not exceed the amount that would be included in income by the USA if the payment were made to a USA resident. This provision protects "basis" in the retirement plan. If all of the participant's contributions were tax-excludable (for USA federal income tax purposes) when made, the full amount of the retirement plan distribution is taxed by Canada. This is only a crude overview, and the participant's tax lawyer would check the latest developments.

A plan administrator might urge a participant or employee to get expert tax advice.

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