Organizing and administering retirement and other benefit plans require attention to detail and a careful understanding of applicable requirements and laws.
Throw an international workforce into that mix and things become much more challenging and complex. Crisscrossing the globe is a reality of today’s business landscape as companies seek new and innovative opportunities overseas. As a result, an awareness of the issues involved in managing an international workforce, whether inbound (foreigners working in the United States) or outbound (US citizens working in foreign countries), becomes a necessity.
International retirement and benefit programs are typically grouped into one of three categories:
- Provided by the government
- Mandated by the government and provided by employer
- Voluntarily provided by the employer
Definition of Employee
First and foremost, it’s important to formalize the definition of employee in order to properly administer participation. You must determine whether an employee working abroad for a US employer is still considered an employee according to the legal document governing the plan, also known as the Plan Documents.
In order to categorize someone as an employee, employers look at various factors, including compensation and how that employee is paid. If the employee is paid through US headquarters, this can constitute US-sourced income, which may make the employee eligible for benefits in the US. Inversely, the Plan Document often excludes nonresident aliens if they receive no US-sourced income. Therefore, if compensation is paid by local jurisdictions outside of the US, that employee often can be excluded from participation in the plan if he or she is a nonresident alien.
There are also potential issues when employees who are US citizens are paid by the local jurisdiction. These individuals often satisfy the plan’s eligibility rules but cannot participate due to administrative or local tax issues. To avoid this, your Plan Document might exclude these individuals by requiring that eligible employees be paid on a US payroll or by limiting the definition of a participating employer to the US entities.
Similar challenges exist when a sponsoring company has inbound employees.
Sponsors need to fully understand their plan’s eligibility rules to properly organize participation in retirement plans they sponsor. Employees often are eligible for the plan but face challenges when returning to their foreign jurisdiction.
For example, if they return to work for a foreign subsidiary of the US employer, they haven’t incurred a severance for retirement plan distribution purposes because they’re still employed by the employer’s controlled group. In this scenario, they must leave their money in the retirement plan even though they’re no longer eligible to participate.
Controlled groups have specific definitions—subsidiary-parent, brother-sister, or a combined group—and other sets of rules if the parent company is a foreign company. The controlled group rules apply to all related US entities even if their common parent is a foreign company.
Breaks in Service
Other issues relating to retirement plans have to do with breaks in service or length of service. The law provides special rules on what service must be counted for US benefits, particularly for retirement plans. For example, if an employee spends in excess of six months abroad, does this constitute a break in service for US benefits? If so, this would affect vesting provisions.
More commonly referred to as nondiscrimination tests, compliance tests ensure plan provisions aren’t discriminatory toward employees based on their compensation or level in the organization. Compliance tests are required when maintaining tax qualification of a retirement plan.
It’s important to point out that for purposes of applying the various nondiscrimination rules applicable to US tax-qualified retirement plans, all employees, excluding nonresident aliens, of all members of a controlled group—for purposes of plan qualification, coverage, vesting, and contribution limits but not tax deduction rules—are aggregated and treated as employees of a single employer. Similar rules also may apply to the nondiscrimination rules applicable to certain health and welfare plans (such as a voluntary employee benefit association or cafeteria plan).
There also may be employees working in a foreign jurisdiction that need to be included in the compliance testing applicable to the US benefit plan but are excluded due to their work location. Careful review of the controlled group employee population is important so the compliance testing can be correctly performed.
Understand the Differences
Legal considerations vary from country to country. In order to protect themselves and their employees, plan sponsors must not only be aware of these differences but also stay up to date on any changes to employment laws or tax treaties between US and foreign jurisdictions that may impact employee benefit plans.
Employers need to understand which benefits are automatically provided by a foreign government and which are required to be provided by employers for their employees working in that country. For example, paid time off benefits, such as vacation, holidays, maternity and paternity leave, and medical leave, may not be required for employers in the US but are common government-mandated benefits in other countries.
In the US, for example, employers generally are free to dismiss employees, barring any discriminatory or retaliatory reasons. In some countries, such as the United Kingdom and Canada, employers have to pay damages for a dismissal that’s considered unfair—even absent any discriminatory reasons. This is a significant difference.
In addition, hiring contractors versus salaried employees abroad is a decision that hinges on understanding the criteria for legal employment. Contractors, whether local to that country or expatriate, often are required to have their own registered businesses and invoice their hours for every contract, for example. If you hired a contractor without a registered business, then you would fall short of the law.
Here are some examples of the stark differences in legality of benefits in the US versus abroad:
- Foreign companies, most notably in Europe and Australia, are very generous in their policies related to vacation and sick and maternity leaves.
- Certain countries also extend leave policies to encompass other activities, such as building homes or career development.
- Benefit packages often can’t be altered without approval from a union, which plays an integral role in foreign workforces.
- Noncompete agreements are generally prohibited in foreign countries.
- The length of time required to give employees notice of possible layoffs varies across countries.
Some benefits may not be required, but it’s difficult to recruit and retain employees if an employer doesn’t offer benefits that most other employers in that country provide. It’s important to research which voluntary benefits are customarily provided by employers in a specific country.
Regardless of what benefits are required or voluntarily provided in other countries, employers should clearly define the eligibility criteria in their benefit plans, such as group health plans, retirement plans, and various cafeteria plans. This will help alleviate any confusion among employees.
This only scratches the surface of challenges that employers face today when crossing international borders. Whether employers experience a bumpy or a smooth ride will depend on how well they educate themselves on the rules of plan organization and administration.
We're Here to Help
Designing and managing benefit and retirement plans for your employees poses complex challenges and risks—all the more so when your company expands across borders. It can be difficult to keep straight multiple sets of laws and definitions so that you maintain your responsibilities, protecting plan sponsors and employees both inbound and outbound. Contact your Moss Adams professional if you have questions about risks or designing a benefits plan that’s effective for all parties in a global setting.