Employers maintaining U.S. taxqualified retirement plans may wish to include employees located outside the United States in the U.S. program. However, employers should consider applicable legal and tax consequences before extending coverage to non- U.S. employees.
Compliance with U.S. Labour and Tax Code Requirements
There are no outright prohibitions in the U.S. Internal Revenue Code (IRC) or the Employee Retirement Income Security Act of 1974, as amended (ERISA), that preclude an employer from extending its U.S. qualified retirement plans to employees (U.S. citizens, residents and non-resident aliens) working outside the United States. However, once an employee is a plan participant, most ERISA and IRC requirements apply to that employee regardless of whether he or she is a U.S. citizen, resident or non-resident alien.
For example, IRC maximum benefit limits, joint and survivor annuity rules, vesting, benefit claims procedures, and ERISA and the U.S. Department of Labor’s disclosure requirements all apply to non-resident aliens and U.S. residents to the same extent applicable to U.S. citizens. This means that all information required to be gathered on U.S. employees will also need to be gathered on non-U.S. employees, which may prove difficult when relevant information is located outside the United States. Consequently, employers should be careful before extending U.S. qualified retirement plans to non-U.S. employees.
U.S. Taxation of Retirement Plan Payments
Employees working outside the United States who are U.S. citizens are subject to U.S. taxes on their worldwide income. When a U.S. citizen employee receives a payment from a U.S. qualified retirement plan, the payment generally will be subject to U.S. tax regardless of the country in which the employee resides. By contrast, only a portion of payments made to nonresident alien employees covered by a U.S. qualified plan generally will be subject to U.S. tax. In some cases, treaties reduce or eliminate U.S. taxation or withholding. Employers considering extending U.S. plans to employees in locations outside the United States should be aware of the different U.S. tax treatment of plan payments to such employees, depending on whether the employee is a U.S. taxpayer or non-resident alien, a treaty exists, or the plan is a defined contribution or defined benefit plan.
Taxation of Pension Payments in Employee’s Country of Residence
Covered employees may not fully enjoy the tax advantages of a U.S. plan if they are residents of a country that does not recognise the tax-deferred status of that plan. The country of residence may immediately tax contributions made to the plan by the employer or the employee and may tax the earnings accruing in the U.S.-based trust. The U.S. plan may be responsible for withholding foreign taxes on plan benefits earned by foreign employees, although foreign tax credits or treaties may mitigate this problem.
Other Concerns for Employers
Employers must also consider securities laws in the employee’s country of residence. These may require registration of the employee’s interest in the plan under that country’s registration requirements. Currency f luctuations also should be considered, and employee programs should clearly spell out the applicable exchange rate for contributions, distributions, interest crediting, etc. Plan adoption requirements should be reviewed and completed by officers who have the proper authority under local law and corporate bylaws.
Despite these challenges, frequently transferred employees who are U.S. citizens or residents may benefit from coverage under a U.S. qualified plan throughout their period of employment, rather than relying on a patchwork of plans provided by each employer or mandated by each country in which the employee temporarily resides. Employees anticipating retirement in the United States also may prefer that pension benefits remain within a U.S. tax qualified framework. As a result, employers are often faced with the challenges of deciding whether to cover non-U.S. employees under U.S. qualified retirement plans.