401Ks for nonresidents

Many employers are looking for ways to recruit and retain top-level employees, and an attractive benefits package is one great way. As we’ve written before, younger employees are doing better at saving and even sacrificing purchase of consumer goods to do so. But extending your plan to cover all your employees eager to get started on retirement saving may need to consider whether all of those employees are U.S. citizens or their residency status. There are over 200,000 non-citizens currently working through a visa.  If your employees are citizens of other countries and live and work in the U.S. on a visa, they may be considered non-resident aliens (those without green cards and who do not pass the IRS’s substantial presence test). 

Many employers want to offer their retirement plan to as many of their employees as possible, including long term non-residents.  Including employees in a plan has a different set of concerns than excluding employees from a plan. IRS rules (IRC 410(b)(3)(C)) allow a plan to exclude non-resident aliens and those who receive no earned income from the employer within the U.S.  That language may help employers exclude employees in foreign countries or operating foreign subsidiaries. It may also be useful where a country’s definition of employee differs from that held in the U.S. (as to employees versus independent contractors). With that said, those non-resident aliens who work for your company domestically may want to participate. To include them, first look at your plan documents with your financial advisors to determine how inclusive your plan language already is.  Some plans exclude nonresident employees along with hourly employees from who may be eligible for participation.  Keep in mind too that while an employee may be a nonresident by Immigration and Customs Enforcement (ICE) definitions that same employee may not be a nonresident by IRS definitions.

 A key point in this discussion may be that resident aliens, those with green cards and those lawfully admitted to permanently reside in the U.S. and work here do not fall under the IRS rules concerning exclusion from a retirement plan. That means, if you have employees you are concerned may not be participating in your retirement plan based on their citizenship status, you may not need to alter your plan language, but rather discuss the employee’s specific situation with your financial advisor.  Resident aliens may not be excluded from a plan, by IRS regulations. Much of the resident versus nonresident alien status involves the length of time those employees may be present in the U.S., so again speaking to your financial advisor before digging into a plan document is a great first step.

If your plan currently has language that excludes employees in a manner you now wish to change to be more inclusive, an amendment to your plan may be necessary. Only certain people, as authorized by the plan, may amend or change that document. Many plans require the board of directors to approve amendments, others allow the chief executive to do so. Consulting with your general counsel or outside attorney will keep you from making an error on this point. You may need your resolution amending the plan to be timed appropriately (in the year where the amendment takes place) and this could be troublesome if you are also working to have the change take place at the beginning or end of a fiscal or calendar year. Your plan document may allow for ratification of amendments, and again speaking with your financial advisor and/or counsel could help with the timing of this amendment or ratification.

In addition to the concerns an employer should consider, you may want to keep in mind the questions your non-resident employees may have. These include:  What should be done with the funds held in U.S. accounts when they return to their home countries? Should the money be cashed out or rolled over into another account?  Will those funds be taxed ones the employee leaves the U.S.?

As to non-residents, the IRS’s rules regarding cash out of retirement accounts is the same as for U.S. citizens, including potential early withdrawal penalties unless certain conditions can be met. This is true regardless of location of the employee when the funds are cashed out. That means, if your employee returns to Jamaica to retire, the U.S. will tax the retirement funds as if the employee lived in the U.S. Retirement advisors can help your employee in such a position time retirement and withdrawal of funds to the most tax-advantageous position. Roll over of account funds into an IRA is sometimes a solution for such employees, but special rules apply to IRA distributions sent to individuals abroad. Rolling U.S. funds into IRAs in other countries, such as Canada, may also expose your employee to penalties and withholding amounts.