Overseas Plan Participants Refresher

Events outside of the United States have been on everyone’s hearts and minds this fall. Major flooding in Somalia, Myanmar, Liberia, Brazil, Earthquakes in Morocco, Nepal, and Afghanistan, and landslides and flooding in South Korea and China may have many employees concerned about overseas relatives and friends. Conflict and war in other areas, like Ukraine and Israel and The Palestinian Territories are also devastating. Plan sponsors may be concerned for their own families and loved ones, and also for their plan participants who have retired overseas. Our strongest competency is our ability to listen. When we listen, we stay open to finding ways to help our clients and the industry in these difficult times. We know we can be of immediate service to plan sponsors by providing access to relevant and helpful information. We know that plan sponsors with participants outside of the United States may be concerned in these times. We covered this information back in 2019. We’ve updated those articles here with recent information, but as always consult with your compliance counsel before acting.

As we wrote in 2019,[1] retirees used to plan international travel adventures. Now, retirees move to warmer (or less expensive) climates and host their friends.  Nine million Americans live abroad, according to the State Department, up slightly in the last four years from 8.7 million. It’s estimated that five million American retirees live abroad. Those living abroad may have two concerns when it comes to their retirement funds: bank account access and email.

Those living abroad who have concerns about access to their bank accounts may worry about whether foreign banks will provide consistent access to cash.  Many retirees have their retirement income paid into their US bank accounts, according to the social security administration. That may mean US citizens abroad may have access to funds via internet banking that others in their country wouldn’t have due to natural disasters or conflict that could physically shut a bank down.

But access to retirement funds (whether for those already retired or for employees working abroad who want to make hardship withdrawals) may bring additional problems simply by getting access to disclosure materials and forms. Opting for electronic rather than printed mail may be a solution to questions about delivering disclosure materials. New DOL rules allow for email only (in place of posting to a website) that may be easier for participants to read on mobile devices. Sometimes email may load more quickly on a limited internet connection than a website with graphics. The DOL and IRS rules for e-mail can be categorized as location-specific and status-specific.  Those two agencies have a safe harbor for electronic, rather than paper, disclosure when the information is reasonably sure of being received.  Under this Safe Harbor guidance, the DOL will treat electronic disclosure equally to first class mail, so long as the guidance is followed.  Plan information will meet the requirements so long as the system used to send the electronic disclosure is designed to assure actual receipt and is tested or monitored frequently.  This system also requires plan administrators to audit the system for unopened email. The DOL also requires that the plan participants must affirmatively consent to electronic disclosure.  To qualify as an affirmative consent, a plan participant must receive a disclosure from the plan administrator that notes essential elements including, the types of documents the electronic disclosure consent would apply to, the procedures for changing consent, the right to request a paper version of a document, and computer system requirements for viewing documents and receiving disclosures.

The IRS has equivalent electronic disclosure guidelines. That agency specifies two methods of electronic delivery of plan information: the General Method which is equivalent to the DOL’s Safe Harbor provisions and the Alternative Method which allows plan information to be sent by any method so long as the recipient has an effective ability to access the disclosure. This rule includes website access, in addition to email.  Concerns for plan administrators relying on email to send disclosure materials include whether they have the most updated email address for retirees and whether retirees can consistently access their email system while abroad.

Sponsors may also be concerned for their plan participants who are citizens of countries in conflict. We discussed 401(k) inclusion for nonresidents in past articles.[2] There we noted that if your plan included non-resident employees, e.g., workers who have green cards or other authorization to work in the U.S., 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.?

If those employees need to return to their home countries, you may be wondering how to assist them. 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 the 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.

[1] https://www.bcgbenefits.com/blog/retiring-overseas

[2] https://www.bcgbenefits.com/blog/401ks-for-nonresidents

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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