QPSA Lump Sum Payment to Nonresident Alien

[RTK]

I have looked at pension plan payments to nonresident aliens before in the context of a survivor annuity payable under a joint and survivor annuity to a (surviving spouse) nonresident alien individual residing in the Cayman Islands.    The deceased participant was a U.S. citizen who participated in a U.S. pension plan.  My basic conclusions then were:

1. A foreign person nonresident alien is subject to U.S. income tax on U.S. source income.
2. The survivor annuity is U.S. source income (it was derived from a pension attributable to contributions made to and held in a U.S. trust for services performed by the participant in the U.S).
3. The survivor annuity is subject to Chapter 3 withholding at a 30% rate (no tax treaty, nonresident alien individual did not engage in a trade or business in the U.S., payments not exempt under 871(f) because survivor annuity is derived from a pension earned by a U.S. individual).
4. The pension plan is required to report the payments to the IRS and the nonresident alien individual on Form 1042-S and to file a tax return with the IRS on Form 1042.

The same basic facts apply in this instance, except that the (surviving spouse) nonresident alien individual is a resident of Kenya (no tax treaty).  Thus, I think my prior basic conclusions would apply to monthly QPSA payments made to the nonresident alien individual.

The wrinkle here is that the pension plan allows a surviving spouse eligible for a QPSA to elect a lump sum payment in lieu of monthly payments.  This raises issues for which there are no apparent answers:

1. Is the lump sum payment an eligible rollover distribution for which the pension plan must offer the nonresident alien individual a direct rollover/direct payment election.  The clearest guidance for a yes answer may be the 402(f) notice providing that "If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or U.S. employer plan, ... the plan is generally required to withhold 30% of the taxable amount...."  No need for this statement if a nonresident alien individual is not required to be provided with a direct rollover/direct payment election.
2. If the nonresident alien individual elects a direct rollover to a traditional IRA, questions include (i) is the direct rollover subject to any withholding, (ii) is the direct rollover reported on Form 1099-R, and (iii) if reported on Form 1099-R, is the direct rollover also required to be reported Form 1042-S.  Form 1042-S provides only for reporting of "gross income."  It is not clear if 'gross income" is "taxable income."  A concern here is what tax rules would apply to the IRA if the amount of the direct rollover is reported on Form 1042 as subject to 30% withholding.  A factor here may be that the direct rollover is not taxable income (at least for U.S. residents) and the dollars remain in the U.S. in a U.S. IRA and presumably would be subject to withholding when paid by the IRA custodian to the nonresident alien individual.
3. If the nonresident alien individual elects a direct rollover to a Roth IRA, same type of questions.  However, the direct rollover would generate taxable income.  This argues for the application of 30% withholding and reporting on Form 1042-S.

I would appreciate any input you may have

Rich Kennedy