As large companies increase their global presence, their workers are becoming increasingly mobile between jur isdict ions. Such companies need to be aware of a number of international benef its issues that can have an impact on companies and their mobi le employees. The following scenarios are typical of those an international company may face.
Scenario 1: From the United States to Germany
A US-based employee transfers to the headquarters of a German company for three years. What happens to his medical and retirement benefits?
With respect to the transferred employee’s medical benef its, the employee’s US benefits will likely expire once the employee transfers to Germany. However, because Germany runs a deviating system of mandatory public medical benefits, the employee is obliged to contribute to that system and may simply utilise these benefits as necessary. Some companies with large global workforces also sponsor expatriate plans to ensure expatriates have continuing access to coverage similar to that offered in their home countries. As the German system is mandatory and sponsored by employer and employee 50:50, expatriate plans involving Germany may easily lead to doubled costs.
With respect to the transferred employee’s retirement benefits, the analysis is even more complicated. Because a transfer can have a significant impact on the employee’s retirement benefits, the company must first analyse the benefit rules applicable in the United States and Germany. Following the completion of this analysis, the company must decide whether and how it will remedy any retirement benefit inequities resulting from the transfer.
First, the company must review both the US plan provisions and the German pension rules. With respect to the US plan, tax-qualif ied retirement plans (e.g., pension and 401(k) plans) typically preclude participation by employees with no US-source income.
Assuming the employee transfers to the German payroll upon relocation, he will have no US-source income, and will therefore be excluded from participating in his company’s US retirement plans. This ineligibility will leave him with US$0 in retirement benefit accruals under the US plans for his three years abroad. However, because German law requires all employees working in Germany to contribute to a statutory pension scheme, the employee will accrue some retirement benefits and will have access to these funds upon his retirement.
Next, the company may wish to compare the retirement benefits the employee would have earned had he stayed in the United States with those he is earning under the German statutory pension. Because the German statutory benefits are likely not comparable to the transferred employee’s US retirement benefits in both type and amount, the company may wish to offer the transferred employee a “mirror” of his US retirement benefits while he is working abroad. Under this type of arrangement, the company promises to pay the transferred employee the additional retirement benefits the employee would have accrued under the US plan, had he continued working in the United States. It is worth noting that any such benefits must be paid from the general assets of the company and cannot be paid from a qualified retirement plan because the plan does not specif ically provide for these mi r ror benef it s. Depending on the arrangement, these benefits may also be subject to Code Section 409A of the US Internal Revenue Code, which imposes a 20 per cent excise tax on nonqualified plan payments unless the company follows specific rules relating to time and form of payment.
Scenario 2: From the United States to Italy
A US-based employee transfers to her company’s Italian office for one year, but remains on the US payroll. What happens to the employee’s medical and retirement benefits?
Because the employee remains on the US payroll, she is typically eligible to continue participating in the US medical and retirement plans. The company should verify the employee’s continuing eligibility with its legal counsel. More important, the company should also confirm with Italian counsel whether the company is required to make any statutory pension contributions on behalf of this transferred employee.
Despite the fact that the employee remains on the US payroll, some jurisdictions will require statutory pension contributions by virtue of the fact that the transferred employee is performing services in that jurisdiction. Finally, the company should also verify the transferred employee’s eligibility for any private pension schemes sponsored by the Italian office.
Scenario 3: From Germany to the United Kingdom
A Germany-based employee transfers to the United Kingdom. What happens to his medical and retirement benefits?
A transfer within the European Union is quite different to the scenarios described above. In particular, claims gained against one Member State system regarding social security may count against claims that have been accrued in another State. Moreover, it is significantly easier to remain in the home country’s social security system while working abroad in the host country. In addition to the State plans that exist more or less in every European country, company-funded plans may play a major role in the United Kingdom. In this scenario, an employee would therefore either take advantage of UK company-funded plans, or use an additional German private health insurance to cover his time in the United Kingdom.
Scenario 4: Non-US Citizens Participating in US Plans
A French citizen works in her company’s New York office for five years, and is eligible to participate in the company’s non-qualified deferred compensation plan, which is subject to Section 409A of the Internal Revenue Code. Does this mean the French citizen is also subject to the provisions of Code Section 409A?
Because the employee is accruing benefits under a plan subject to Section 409A of the Internal Revenue Code (Code Section 409A), she is also subject to Code Section 409A. Therefore, the time and form of payment of the French citizen’s plan benefit must comply with Code Section 409A. If, for some reason, payment of her award violates Code Section 409A, she will still be subject to a 20 per cent excise tax on the amount paid. Code Section 409A does not include any exceptions for non-US citizens participating in a US-based plan.
Scenario 5: Equity Grants Across Multiple Jurisdictions
A US company wants to provide equity grants to employees working in multiple jurisdictions. Is this feasible?
Such an offering is feasible, but the company should contact legal counsel in each of the targeted jurisdictions to determine the relevant caveats of such an award in that particular jurisdiction. Potential issues include the need for works council approval (a potential issue in many jurisdictions, including Belgium, France and Germany), the applicability of forfeiture provisions (a potential issue in France, amongst other jurisdictions), and the need for adherence to a detailed of fering procedure (for example, China has detailed offering procedures that all overseas companies must follow).
As each situation is always unique, specific advice should be sought to determine the most cost-effective and compliant outcome for each individual company.
Lisa Loesel also contributed to this article.