Foreign Employees and Company Retirement Plans
One of our clients recently posed this question to us: “We have some foreign employees coming on board; what do we need to be thinking about for them regarding our 401(k) plan?” Read on for our answer!
Plan Sponsor Considerations
If your foreign employees are technically employed by another entity located in another country and those employees are not earning US dollars, you don’t need to worry about it. Stop reading here.
Exclusions. But, what if you have foreign employees working here in the US? The first thing you need to find out is their classification - there is the resident alien or the non-resident alien. These two classifications are treated differently tax-wise. Many plan sponsors have the option to exclude non-resident aliens from their plan. Resident aliens, however, are typically treated as citizens tax-wise, so you can’t exclude them from your plan. You will need to check your plan document to find out what exclusions you’ve elected for plan eligibility.
Eligibility. Once you determine their classification, you’ll need to determine if they will be working for your organization long enough to meet your plan’s eligibility and service requirements, the same ones that all employees must meet, in order to enter the plan. If they’re only going to be in the US for, let’s say six months, and the eligibility service requirements are one year of service, it’s a moot point. They won’t be eligible for the plan.
Prior Service. You’ll also want to figure out how to handle any time the employee spent working at your overseas locations. Will you recognize and apply that time to the plan eligibility requirements? If so, you’ll aggregate that time and apply it towards the plan’s eligibility service requirement. Check that you can enter their original hire date in the recordkeeping system and not have the payroll system accidentally overwrite it with the US hire date.
Vesting. The same goes for vesting - recognizing prior service will affect the employee’s vesting of company contributions. Everyone gets excited about the company match, but if they are not going to be working at the company long enough to vest in those contributions, it would be good to let the foreign employee know in your communication strategy.
Frequent relocators. Another consideration is whether the foreign employee will be bouncing to different corporate locations between overseas and US locations. If they are, and will remain in the plan for their next US posting, you’ll need to consider how you’re going to get the required notices to them. You need a current mailing address for them, and may I HIGHLY recommend a current email address for electronic delivery! Some recordkeepers cannot accommodate an overseas address, so be sure to check with your plan provider.
Taxes. Finally, offering access to a tax professional to help them make decisions and navigate the rules is a great benefit for these types of employees and one we strongly recommend!
What Should You Tell Foreign Employees?
In addition to the usual items you provide employees regarding the retirement plan - summary plan description, highlights, enrollment package, etc .- there are best practices about additional information to provide to foreign employees.
If you withdraw pre-tax dollars from a retirement plan, you will likely owe the US government some tax money, regardless of age! And, regardless of citizenship, early withdrawals come with taxes and penalties. (Yes, there are exceptions. Ask a qualified tax professional, not us.)
Let’s say a foreign employee works for your company for a few years, participates in the retirement plan, and is now headed back to their home country. Can they take the money they’ve accumulated in their retirement account back to their home country, or should they leave it in the U.S.? It’s actually a sticky situation!
There are different tax treaties that the U.S. has with other countries, which in turn will affect how the money gets taxed on either end, whether they will be able to transfer the money to another foreign retirement account keeping the same tax implications in place, etc. This is where we need the services of an accountant who will know the ins-and-outs of the treaties and regulations regarding such matters!
The employee could leave it in the plan indefinitely (assuming the balance is above the force-out threshold) if the recordkeeper is okay with having a foreign address associated with the participant. Roth contributions are also a possibility, unless the tax treaty with the employee’s home country doesn’t recognize Roth or views the proceeds as earnings even though it was a tax-free withdrawal in the US. It’s also possible to rollover to an IRA; again, you’ll need to check with the financial institution about the foreign address.
Everybody needs to save for retirement no matter where they’re living; foreign employees who work for you deserve that benefit (as long as they meet the eligibility requirements, of course!). They just need to have a handle on taxes, options for withdrawals, and other issues that are specific to foreign employees.
A friendly reminder: Retirement Planology does not offer legal or tax advice! The above was just general info; always consult an accountant/tax professional/lawyer for specific questions regarding this situation.
If you’re one of our clients (or want to be) and this is an issue on your mind, reach out and we can discuss!