Candian Employee

[Guest jark]

Can an employer who has hired a candian resident, who's working in canda and only earning Candian income (no us based income) allow that participant to participate in their 401k plan?

[ESOP Guy]

I hope so as I have plans with Canadian employees in it.

As far as I can tell they are employees and the document doesn't say to exclude them you have to include them..

You just need to watch the exclusions. Alot of plan have the default provision that say the plan doesn't cover non-resident aliens who have no US source income. But if your plan doesn't have that exclusion in it I think you have to cover them.

[Guest jark]

So what would be the tax benefit (if any) for them to participate in this type of plan. How would tax withholding work on the back end if someone were to take a distribution? Would it be an automatic 30%?

[ESOP Guy]

I really don't know how it works on on the personal tax side. I have never looked into it.

The distribution side is a little more complex. Canada is a tax treaty country so you don't have to withold 30% if you get the right forms completed.

Study the instructions for the W8-Ben and the Form 1042-S. If this person completes the W8-Ben you can end up withholding 15% (I think-- I would have to look up the rate). Although I have to admit US banks are not always willing to go below the 20%. The other wrinkle is they are being paid from a US trust so they get checks in US dollars. Canada that isn't too big of a problem. Most of those banks can handle a US to Canadian dollar transaction.

You can also end up with other oddness. Canada has much more generious maternity leave laws. They can be read as meaning you have to give a contribution when your US plan wouldn't give one to a person on leave. So do you follow the law or the plan document?

Like I said it can be done just a little more work.

[Peter Gulia]

A fiduciary might consider disclosing the double-taxation effects of the U.S.-Canada income tax treaty.

Or at least warning an eligible employee to seek tax advice.