Problems that arise when individuals on overseas assignments participate in U.S. qualified plans.

• Author: Schlabach, Tracey

Employers often let U.S. nationals and foreign nationals participate in U.S. qualified plans while they are on overseas assignments. Unfortunately, participation by overseas assignees can jeopardize a plan's qualified status if it causes the plan to violate the exclusive benefit rule or to experience operational failures. This item discusses how these participation-related issues arise and what plan sponsors can do to avoid or correct them.

The Exclusive Benefit Rule

The first issue to consider is whether overseas assignees' participation in a U.S. qualified plan (e.g., a defined benefit, Sec. 401(k), or profit sharing plan) complies with the exclusive benefit rule of Sec. 401(a)(2). The exclusive benefit rule requires a qualified plan to be established and maintained for the exclusive benefit of employees or their beneficiaries. Violations of the exclusive benefit rule can arise when foreign nationals or U.S. nationals (U.S. citizens, U.S. residents, green card holders, U.S. substantial-presence tax residents, and individuals electing to be treated as U.S. residents) participating in a U.S. qualified plan are not employees of a "participating employer" (one of the employers listed as participating in the plan).

However, for purposes of the exclusive benefit rule, all members of a controlled group are considered employed by a single employer. Consequently, participation in a U.S. qualified plan by assignees should comply with the exclusive benefit rule if the foreign "home employer" (the organization that transfers assignees) or foreign "host employer" (the organization to which assignees are transferred) is a participating employer or in the same controlled group as one of the participating employers. Nevertheless, if a foreign home or host employer is not a participating employer or in the same controlled group as a participating employer, the plan will not always violate the exclusive benefit rule. Rather, a violation will occur if an inbound or outbound assignee participates in the U.S. plan while he or she is considered to be a common law employee of a foreign employer that is neither a participating employer nor in the same controlled group as a participating employer. A "controlled group" is defined for qualified plan purposes in Secs. 414(b), (c), and (m). A detailed discussion of the controlled group rules is beyond the scope of this item, but parent-subsidiary controlled groups are the most common, in which one organization owns a...