Employee Plans - Global International Issues
I'm Monika Templeman, Director of Employee Plans Examinations.
Our EP international focus is necessitated by the increasing number of U.S. companies that have employees working abroad and the fact that the U.S. entities are doing business in countries worldwide.
Clearly, the global economy has an impact on employee retirement plan benefits.
Accordingly, an increasing number of EP examination cases have issues relating to the movement of funds and workers between the U.S. and overseas jurisdictions.
As globalization expands, EP is challenged by International/U.S. territory non-compliance; lack of information on reporting of many cross-border transactions; the ease of using complex international structures; and constantly evolving compliance issues.
The fast-paced change in the global economy requires an equally fast-paced change within the IRS Employee Plans function.
EP International activities span the gamut, from issues involving huge multinational corporations and high wealth taxpayers to issues involving money and taxpayers across the board in all formats, including IRAs maintained by retirees overseas.
Approximately $17.4 trillion - trillion with a "T" - is invested in the million-plus retirement plans that cover over 90 million participants.
Employee Plans is concerned about tracking the trust records and assuring they're being used exclusively as retirement benefits for plan participants.
To ensure compliance, we continue to expand coverage of international issues related to multinational corporations, assets sheltered offshore, and U.S. taxpayers abroad.
That said, the majority of our EP International work involves retirement plans with over 2,500 participants that are being examined by our Employee Plans Team Audit - or EPTA - large case groups.
At this juncture, I want to clarify for EP purposes, an international examination is defined by the involvement of a multinational employer.
For the most part, conducting an examination of a multinational employer is similar to any other Employee Plans audit examination, with a few exceptions.
The scope of the examination increases due to the increase in the number of employees, employers, and countries under consideration.
Certain treaties and other international implications may affect, for example, such things as deductible limits under IRC Section 404, distributions to participants, benefit accruals, eligibility, and coverage.
The major difference between a domestic and international audit are the issues involve multinational companies.
What I'd like to share with you today are the recurring mistakes EP agents are finding in these examinations and the tips on how to find, fix, and avoid these errors.
The first error involves pension expenses relating to foreign pension plans that are recorded on an employer's books for financial accounting purposes.
The amount of these expenses can be substantially different from the amount of contributions to the plan that is deductible under IRC Section 404A.
Oftentimes a Schedule M adjustment is made to deduct contributions made to a foreign pension plan subject to the limitations in Section 404A.
We have found book pension expenses that relate to the foreign plan being deducted in addition to deductions taken for contributions made to the plan.
As a result, the aggregate amount of deductions taken for contributions and expenses related to the foreign pension plans exceeds the deductible limit under IRC Section 404A.
To find this error, determine if any book expenses related to the foreign pension plan have been deducted on the tax return.
Also, review all Schedule M adjustments that relate to foreign pension plans.
Finally, add the total deductions taken that relate to the foreign pension plans and determine if the amount exceeds the limitations under Code Section 404A.
If the foreign pension plan deductions exceed the Code Section 404A limitations, you can fix the error by filing an amended return with the proper pension deduction.
To avoid this error, remember, if you deduct the foreign pension plan contributions pursuant to IRC Section 404A through a Schedule M adjustment, then pension expenses recognized for financial accounting purposes must be reversed for tax purposes.
The next recurring issue found in international examinations is one we find in most other 401(k) plans - late deferral deposits.
Employers are required to forward and timely remit the company's 401(k) plan contributions withheld from workers' paychecks.
You could violate ERISA by failing to ensure that employees' contributions were remitted to the plan.
You're responsible for contributing the amount of elective deferrals made by plan participants to the trust in a timely manner.
Department of Labor rules require that the employer deposits elective deferrals to the trust on the earliest date that the employer can reasonably segregate the amount from the employer's general assets.
Find this error by determining the earliest date deferrals can be segregated from general assets and compare that date with the actual deposit dates and any plan document requirements.
Fixing this error involves depositing all elective deferrals withheld and lost earnings resulting from the late deposit into the plan's trust using a correction method found in the most current correction program revenue procedure.
You should file Form 5330 to report the excise taxes on late contributions.
Avoid this error by coordinating with the payroll provider to determine the earliest date you can reasonably segregate the deferral deposits from general assets.
Set up procedures to ensure that you make deposits by that date.
The last recurring issue found by the large-case exam agents involves Form 1042-S.
A foreign person is subject to U.S. tax on income earned within the U.S.
Amounts subject to reporting on this form are amounts paid to foreign persons, including persons presumed to be foreign, that are subject to withholding, even if no amount is deducted and withheld from the payment because of a tax treaty or IRC exception to taxation or if any amount withheld was repaid to the payee.
Amounts subject to withholding are amounts from sources within the United States that constitute fixed or determinable, annual or periodical income, or FDAP.
The person who makes the payment is the withholding agent.
This agent is obligated to withhold typically 30% from the first dollar paid, with certain exceptions.
This withholding agent is required to file Forms 1042 or 1042-S.
Form 1042-S is required to report the payment of U.S. source income and any amounts of income tax withheld.
If you filed a Form 1042-S and later discover an error, it is important to file an amended Form 1042-S as soon as possible.
If this error changes information on your filed Form 1042, you must also correct the Form 1042 by filing an amended return.
Become familiar with the form and the instructions.
The instructions provide detailed explanations and list common errors users make when completing this form.
We will continue to develop capabilities to address key international issues affecting the Employee Plans sector.
Collaborating with other IRS divisions, our goal is to continue to expand our international enforcement coverage, identify new international issues, provide online Web materials and, most importantly, ensure effective global tax administration.
For more information, follow us on our Web at IRS.gov/retirement.