exclusion from plan by citizenship

Hello All - I have a US based company that may be hiring a Canadian employee.  The client tells me that the employee will be paid on a W-2 form and therefore would otherwise be eligible for the client's 401k.  Is it possible for the plan to have "Canadian based employees" as an excluded category for eligibility?  I wasn't sure if that category would be considered discriminatory in any way or if there is a better way to accomplish what the client wants.  This particular client plan will easily pass coverage. 

Thanks in advance. 

After collecting relevant facts, including when and where the employee works, and considering how the US-Canada income tax treaty applies in the employee’s circumstances, the plan sponsor might consider this:

“Special treaty rule.  In addition, an employee who is a nonresident alien (within the meaning of section 7701(b)(1)(B)) and who does receive earned income (within the meaning of section 911(d)(2)) from the employer that constitutes income from sources within the United States (within the meaning of section 861(a)(3)) is permitted to be excluded, if all of the employee’s earned income from the employer from sources within the United States is exempt from United States income tax under an applicable income tax convention. This paragraph (c)(2) applies only if all employees described in the preceding sentence are so excluded.”

26 C.F.R. § 1.410(b)-6(c)(2) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.410(b)-6#p-1.410(b)-6(c)(2).

If you have no coverage issues (assuming you can't statutorily exclude per Peter) then I strongly suggest excluding the employee and maybe give them more in pay. Interestingly (or annoyingly) it's the complexity of Canadian retirement plan rules that are the big headache, and more for the employee than the employer if I remember. Do everyone a favor and make it easier by excluding.

The client would like to exclude the person and compensate him in other ways.  The employee will be working remotely - so not physically here in the States at all.  Not even for meetings and such, which will all be done via Zoom or other remote methods.  Even though the employee will receive a W-2 form, the client tells me that the payroll company will be handling the required reporting on the Canadian side and that the employee will pay tax in Canada on the wages (will not pay U.S. taxes).   The plan excludes "non-resident aliens" (see below from the Trust Doc) tying in with what Peter mentioned above.    So ultimately I don't think there needs to be a separate category amended to exclude this employee.   Agreed? 

  (e)      Nonresident aliens. If, in the Adoption Agreement, the Employer elects to exclude nonresident aliens, then Employees who are nonresident aliens (within the meaning of Code §7701(b)(1)(B)) who received no earned income (within the meaning of Code §911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code §861(a)(3)) shall not be eligible to participate in this Plan. In addition, this paragraph shall also apply to exclude from participation in the Plan an Employee who is a nonresident alien (within the meaning of Code §7701(b)(1)(B)) but who receives earned income (within the meaning of Code §911(d)(2)) from the Employer that constitutes income from sources within the United States (within the meaning of Code §861(a)(3)), if all of the Employee's earned income from the Employer from sources within the United States is exempt from United States income tax under an applicable income tax convention. The preceding sentence will apply only if all Employees described in the preceding sentence are excluded from the Plan.

If the person's income is subject to Canadian income tax and not US income tax, then yes.

If it's questionable at all then, yes citizenship would be a permissible exclusion, it meets the definitely determinable rules as easily classified and not subject to employer discretion.

But what if the US based employer wants to include the Canadian employee?  Does the Canadian employee have to have US income? If they don't have US income, how would they even be able to make an election to have salary deferrals?