Control Groups & Foreign Subsidiaries

Hi all--I'm getting conflicting advice on what should hopefully be a straightforward issue.

I work for a US-based small business, and we have a wholly-owned French subsidiary. US business is the parent co & pays the US employees, while the French sub pays our French employees. Meanwhile, we also have a few remote individuals in countries like Canada & Portugal, and we use an EOR (Rippling) to pay them.

I am looking to set up a 401K for our US employees and speaking to potential plan providers. One plan provider said our structure should present no issues when it comes to controlled groups since any associated rules would only be looking at US employees; however, another provider has been adamant in saying that all non-US employees (French & otherwise) will be included in Department of Labor non-discrimination testing due to controlled group rules.  If the latter is true, this obviously prevents an issue for us since (1) we cannot actually offer a 401K to non-US employees, and (2) wages are very different across country lines.

Can someone please advise?

It sounds as though you have non-resident aliens earning no U.S. source income.  As long as your plan affirmatively excludes people like this, you can exclude them from coverage/nondiscrimination testing.

thanks, that's what i thought too?

the only reason im nervous is it's fidelity who is the one insisting they cant work with us because of the controlled group issues, and one would think they know what they're talking about when it comes to 401ks

1 hour ago, vintagelemon said:

thanks, that's what i thought too?

the only reason im nervous is it's fidelity who is the one insisting they cant work with us because of the controlled group issues, and one would think they know what they're talking about when it comes to 401ks

😂

Bri's answer is absolutely correct.  That's always been a fundamental coverage exclusion rule.  In the plan document exclude non-resident aliens with no US source income.  Then make sure you document the excluded employees, which can be tricky if you are talking about a large group of potential exclusions.  Regarding the comment on Fidelity.  " . . . one would think they know what they're talking about when it comes to 401ks"  One might think so, but one would be wrong.  Same with Vanguard and the other biggies in the game.  Their business is investing assets, not in providing legal advice.  It may also be that Fidelity (and the others) don't want to get involved with plans that have other than "routine" situations -- they may conclude that the risk isn't worth it for the money they'd make.  I speak from experience.

NEVER believe anything anyone at Fidelity, Vanguard, Merrill Lynch, or any insurance company platform tells you.  They are almost always wrong!  If you really want to go with Fidelity, you have to work your way up the representative chain.  Start by immediately asking (nicely) to speak to a supervisor and start from there.  Eventually, you might get to someone who actually knows something....

Let's not be in a hurry to condemn the major recordkeeping platforms, and certainly only someone who has never made a mistake should cast the first stone.

As a business, the major platforms operate within the constraints of their service agreements, most of which at some level leave to the plan sponsor the responsibility to interpret the plan and decide what to do.  Plan sponsors should not assume that everything that could happen with a plan is within the scope of formal scope of services presented in the agreement.  Plan sponsors also should not assume that the service agreements protect them from breaches in their fiduciary responsibilities.  Yes, some individuals at service providers do not know the boundaries of their knowledge and try to be helpful (sometimes even try to be logical), resulting in providing incorrect information to the plan sponsor.

Best practices for a plan sponsor is to work with a retirement plan professional who will have detailed knowledge about the plan provisions, the plan sponsor's perspectives on the goals and objectives for the plan, and the role of other service providers.  This may be an attorney, accountant, retirement consultant, financial adviser or TPA.  The independence of the retirement plan professional goes a long way to keeping a plan in compliance.

Certainly none of us who are not lawyer's specializing in retirement plans should be providing legal advice to the plan or its fiduciaries.

I agree with the tenor of the comments, particularly the appropriateness of humility and value of professional advice. 

Note that the definition of "nonresident alien" is technical. For example, a US citizen employed in Paris is not a nonresident alien. Similarly, the term "US income" is technically defined.      

Bri is correct.  Here are the relevant citations:  Code §410(b)(3)(C); Treas. Reg. §1.410(b)-6(c).

The determination of who is or is not a nonresident alien can be very involved.  Chapter 1 of IRS Publication 519, U.S. Tax Guide for Aliens provides guidance on how to determine whether an individual is a non-resident alien or is a resident (or has dual status!) https://www.irs.gov/pub/irs-pdf/p519.pdf

The individual may qualify as a resident but can abandon their status. 

There also is a Substantial Presence Test which gets into topics like counting days worked in the US, commuting to work from another country, days while traveling through the US to name a few. 

The publication has 99 pages discussing rules for Aliens (but not even a word about UFOs 😁).

The bottom line is a plan may have an exclusion for non-resident aliens but it may not be obvious when an individual is a resident alien.