Question 289: Dutch Company owns 100% of U.S. subsidiary. U.S. subsidiary has a plan and excludes nonresident aliens. A Dutch national transfers to the U.S. subsidiary 1/1/06. An ERISA attorney says the definition of 415 compensation includes income regardless of nature or location, and thus this individual's compensation (in Euros) for 2005 will determine his HCE status for 2006. Correct? What about an individual with both U.S. dollars and Dutch Euro wages for a year? The plan defines compensation as Form W-2 compensation.
Answer: I agree, and yes, it is awkward. Let me explain, with references to the 4th edition of my book, Who's the Employer?. (Subscribers can click to view online the text of these references.)
The base definition of compensation for retirement plan purposes is in 415(c) and the corresponding regulations. [Q 20:1.] The 415 regulations authorizes several possible starting points for determining compensation, the most popular of which is Form W-2 compensation.
It's quite understandable that you would think, "because a Dutch company doesn't have to give a U.S. W-2 to a Dutch national for performing services in the Netherlands, that compensation isn't W-2 compensation." Unfortunately, the regulations disagree. Reg. 1.415-2(d)(11)(i) defines W-2 compensation for pension purposes, and concludes with this sentence: "Compensation under this paragraph (d)(11)(i) must be determined without regard to any rules under section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed . . . ." [Q 20:2.]
So now we come to the question, "Why don't we give W-2s for foreign compensation?" Don't let the fact that the company is foreign fool you. You've said the Dutch company owns 100% of a U.S. company, so the two are in a controlled group. [Q 8:3.] And that means, as far as pension law is concerned (including section 415), the two are a single employer. [Q 10:1.]
How about the fact that the payment is being made to a nonresident alien? Code 3401(a)(6) excludes such payments from "wages" to the extent provided in regulations. Reg. 31.3401(a)(6)-1 tells us that, in general, payments to nonresident aliens are wages unless they are paid for services outside the United States.
Unfortunately, I have to regard that provision as a rule in 3401(a) that limits "the remuneration included in wages based on the nature or location of the employment," which is a rule the 415 regulations command us to ignore. In other words, just because it isn't wages for W-2 doesn't mean it isn't compensation for plan purposes.
Just to "tie a bow" on this, I should note that 415 compensation automatically includes all compensation from all controlled group members. [Q 20:8.] While a plan could exclude compensation from a group member for allocation and nondiscrimination purposes (subject to proving that this alternative definition is nondiscriminatory) [Q 20:22] there is no such option for 415 compensation. And a plan must use 415 compensation to determine if an individual is an HCE. [Q 23:9.] This applies to both of the employees in your question.
Of course, this will involve currency conversions, and the Code and regulations have very detailed rules. In some cases, you would have to translate the foreign payment into dollars based on the exchange rates when the payment is made. In your situation, you would likely use an average of the daily exchange rates throughout the year. While I don't profess to have expertise here, let me direct you to Code sections 985 and 989 and IRS Publication 54.
And you thought using W-2 compensation was supposed to make life simple!