A U.S. company has leased U.S. citizens in a foreign country. How are

[Guest Leigh Lindsey]

A U.S. company has employees who are U.S. citizens in a foreign country. The employees are leased employees, and the leasing organization and the U.S. company have no common ownership. However, all leased employees of the leasing organization are employed by the U.S. company. Also, the earnings of the U.S. citizens are not taxable as U.S. income. The employees do not receive a W-2 or any type of 1099.

The foreign government has mandated that all employees of the leasing organization be covered under qualified plan. In this case, the plan is a salary deferral plan with a matching contribution. The U.S. company also provides a 401(k) plan for its rank and file employees. The leased employees are not listed as an excluded group. In considering ADP testing, are the U.S. citizen employees considered "common law" employees of the U.S. corporation? If so, are their deferral and matching contributions treated as a benefit under the U.S. company's 401(k) plan, or are they disregarded for this plan? If the contributions are disregarded and the employees are not listed in the plan document as an excluded group, are they treated as benefiting under the U.S. company's 401(k) plan with a 0% deferral, or are they excluded since they do not earn U.S. income?

The particular situation is one in which two highly compensated and approximately 15 non-highly compensated employees are in the deferral plan of the leasing organization. For the U.S. company's 401(k) plan, I have treated all employees of the leasing organization as non-excludable, non-benefiting, and the resulting 410(B) coverage percentage is 98%. The most beneficial scenario for the U.S. corporation would be to include these employees as non-excluded, benefiting at 0% deferral. The impact of the non-hce's would be minimal, and the impact of the hce's deferring 0% would help the hce group of the U.S. company. However, if I need to take into account the contributions to the leasing organization's plan, there would be no benefit and a possible detriment. In that case, I would recommend excluding the employee group in the plan document as long as coverage is not an issue.

Any help anyone can provide is extremely welcome!!! Thanks!!!

[pjkoehler]

I'm guessing that the unrelated leasing organization is a foreign corporation and that the 401(k) plan of the U.S. company, that is the recipient organization, includes "leased employees," within the definition of Code Sec. 414(n). You describe a situation in which the leasing organization, in conformance with local law, maintains a form of salary reduction plan, with respect to which its employees are required to participate. If you drill down through the 401(k) regulations regarding aggregation of plans and arrangments for ADP testing purposes, beginning with Treas. Reg. Sec. 1.401(k)-1(B)(3)(i), you'll find that aggregation is required only among multiple CODAs of the same plan, or mulitple plans containing CODAs, maintained by members of a controlled group. "Plan" for this purpose means a plan intended to satisfy the requirements of Code Sec. 401(a). See Treas. Reg. Sec. 1.401(k)-1(g)(11). Since the leasing organization's plan is not such a plan, the 2 plans are neither required nor permitted to be aggregated in computing the ADRs of "eligible employees" under the 401(k) plan.

[Guest Leigh Lindsey]

Thank you for your input. Your assumptions were correct.

However, I am more concerned with the fact that these are leased employees. According to my understanding, if a leased employee participates in the leasing organization's qualified retirement plan (except for a safe-harbor plan), contributions or benefits for the leased employees are treated as if provided by the recipient to the extent those contributions or benefits are attributable to services performed by the leased employee for the recipient. In this instance, since all compensation (and, therefore, all benefits) are due to the work performed for the recipient, how are the benefits then treated? Does it matter that the leasing organization is a foreign corporation, and/or that the leased employees have no reportable U.S. income? I would still like to include the leased employees as eligible at 0% deferral in the employer's plan if the benefits under the leasing organization's plan can still be disregarded.

[pjkoehler]

Leigh, you used the term "qualified" with respect to the salary deferral plan of the foreign leasing organization, but I'm guessing that it is not "qualified" for U.S. tax purposes, i.e. it is not intended to satisfy Code Sec. 401(a). In other words, its simply a "nonqualified plan" for U.S. tax purposes. You are correct that contributions or benefits provided by a leasing organization on behalf of "leased employees" are treated as provided by the recipient organization. Code Sec. 414(n)(1)(B). This recipient attribution rule applies only for the purpose of determining whether the recipient satisfies "requirements" arising under certain paragraphs of Code Sec. 401(a); Sections 408(k), 408(p), 410, 411, 415 and 416 and other employee welfare benefit or fringe benefit arrangements subject to special tax treatment. Code Sec. 414(n)(3). However, aggregation of a U.S. qualified plan with a nonqualified (for U.S. tax purposes) plan is not among any of these requirements.

The 401(k) regs do prohibit a qualified CODA from making any benefit other than employer matching contributions or cafeteria plan qualified benefit coverages "contingent upon elective contributions." Treas. Reg. Sec. 1.401(k)-1(e)(6). A CODA may fail this requirement if participation in the nonqualified plan is permitted only to the extent that the participant elects to make or not make elective contributions under the CODA. You haven't mentioned any facts that suggest that such a contingency exists, i.e. to the extent that they are eligible under the 401(k) plan, the "leased employees" are have the unfettered right to make elective contributions under the terms of the plan.