non-US trustee

[Santo Gold]

We TPA for a small 401k plan whose parent company is actually from the UK.  The plan only covers the US employees.  We had three trustees for the plan, 2 of which were not US citizens while 1 was a based in the US and was a US citizens.  The US trustee left the company a few days ago.  He will be removed as a plan trustee.  Is there a problem if there are no US trustees for this plan?

Thank you

 

[Larry Starr]

6 hours ago, Santo Gold said:

We TPA for a small 401k plan whose parent company is actually from the UK.  The plan only covers the US employees.  We had three trustees for the plan, 2 of which were not US citizens while 1 was a based in the US and was a US citizens.  The US trustee left the company a few days ago.  He will be removed as a plan trustee.  Is there a problem if there are no US trustees for this plan?

Thank you

 

A retirement plan (to state the obvious) holds its assets in a trust.  That means, there must be trustee(s).  It is interesting that  it is state trust law that mostly applies to the issue of what is a valid trust (that's why we have a designation in our plans as to what state the plan will come under, even though it's clearly subject to ERISA which is federal law and state law is superseded in  all other areas.  Clearly, the trust assets are still going to be held in a trust that is subject to the jurisdiction of US courts (that's a given and a requirement).  Can you have only foreign individuals as trustees?  Don't have an answer to that. In the estate planning area, naming a non-US citizen as a trustee may result in the trust being considered a foreign trust, which would clearly be a problem for an ERISA plan.  

I think this is one that needs to be kicked up to the proverbial "good ERISA attorney" to opine on.  Or, you can just make sure you have new US citizen trustee appointed and avoid all this mishegas (and yes, that came up in my spell checker!). 

[401K_AZ]

It has always been my understanding that at least one trustee needs to be in the U.S.  When I have looked at this issue before, this is what I have based it on:

A qualified trust under section 401(a) must be created or organized in the United States, as defined in section 7701(a)(9), and it must be maintained at all times as a domestic trust in the United States (See § 1.401-1(a)(3)(i))

In the regulations related to 7701(a)(9), it sets forth a 2-prong test-- the 2nd prong being: “One or more United States persons have the authority to control all substantial decisions of the trust (control test).”  (See § 301.7701-7 Trusts - domestic and foreign). Note that the first prong of that test is that a court within the United States is able to exercise primary supervision over the administration of the trust--hard to do with all trustees residing in other countries.  Also note that further down in the regs, it does state that "Substantial decisions" includes Investment decisions.

There is a Safe harbor for certain employee benefit trusts and investment trusts to be deemed to satifsy the above "control test", "provided that United States trustees control all of the substantial decisions made by the trustees of the trust."  

Whether the safe harbor control test is used or not, it appears that a U.S. trustee is needed.

Now, the regulations do have a transition period for when a change occurs: 

"In the event of an inadvertent change in any person that has the power to make a substantial decision of the trust that would cause the domestic or foreign residency of the trust to change, the trust is allowed 12 months from the date of the change to make necessary changes either with respect to the persons who control the substantial decisions or with respect to the residence of such persons to avoid a change in the trust's residency."
 

[Larry Starr]

3 minutes ago, 401K_AZ said:

It has always been my understanding that at least one trustee needs to be in the U.S.  When I have looked at this issue before, this is what I have based it on:

A qualified trust under section 401(a) must be created or organized in the United States, as defined in section 7701(a)(9), and it must be maintained at all times as a domestic trust in the United States (See § 1.401-1(a)(3)(i))

In the regulations related to 7701(a)(9), it sets forth a 2-prong test-- the 2nd prong being: “One or more United States persons have the authority to control all substantial decisions of the trust (control test).”  (See § 301.7701-7 Trusts - domestic and foreign). Note that the first prong of that test is that a court within the United States is able to exercise primary supervision over the administration of the trust--hard to do with all trustees residing in other countries.  Also note that further down in the regs, it does state that "Substantial decisions" includes Investment decisions.

There is a Safe harbor for certain employee benefit trusts and investment trusts to be deemed to satifsy the above "control test", "provided that United States trustees control all of the substantial decisions made by the trustees of the trust."  

Whether the safe harbor control test is used or not, it appears that a U.S. trustee is needed.

Now, the regulations do have a transition period for when a change occurs: 

"In the event of an inadvertent change in any person that has the power to make a substantial decision of the trust that would cause the domestic or foreign residency of the trust to change, the trust is allowed 12 months from the date of the change to make necessary changes either with respect to the persons who control the substantial decisions or with respect to the residence of such persons to avoid a change in the trust's residency."
 

Perfect; all the more reason to get a US person as a replacement trustee.

[shERPA]

Yup, we ran into this earlier this year with a subsidiary of a NZ company.    Need a US citizen. 

[RatherBeGolfing]

6 minutes ago, shERPA said:

Yup, we ran into this earlier this year with a subsidiary of a NZ company.    Need a US citizen. 

Im pretty sure citizenship is not required if there is legal residency, green card for example.

[shERPA]

I haven't looked at the law again since this came up, but I think residency works too.  But the recordkeeper who was involved in this (and brought it up) wanted a citizen.  

[Luke Bailey]

One solution popular with my clients with similar circumstances is to have a U.S. bank trustee that is directed by a plan committee from the foreign country. See Treas. reg. 301.7701--7(d)(1)(v), Example 5.