structuring inpat and expat pension, health and welfare...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Structuring Inpat and Expat Pension,
Health and Welfare Plans: Challenges
for Multinational Employers Navigating Legal and Tax Implications When Designing Benefits Plans,
Preparing for New ACA Rules on Expatriate Health Plans, and More
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, NOVEMBER 17, 2016
Pam Enright, GPHR, Sr. Vice President, Director of Global Benefits,
Lockton Companies, Kansas City, Mo.
James P. Klein, Senior Counsel, Pillsbury Winthrop Shaw Pittman, New York
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STRUCTURING INPAT AND EXPAT PENSION, HEALTH AND WELFARE PLANS: CHALLENGES FOR MULTINATIONAL EMPLOYERS
Navigating Legal and Tax Implications When Designing Benefits Plans,
Preparing for New ACA Rules on Expatriate Health Plans, and More
Jim Klein Pam Enright
Senior Counsel Director of Global Benefits
Pillsbury Winthrop Lockton Companies
November 17, 2016 1:00 pm – 2:30 pm EST
Outline of Presentation
I. Legal and tax considerations and best practices for multinational employers designing employee benefits plans (Jim Klein presenting)
II. Trends and developments impacting employee benefits for inpats and expats, including ACA regulations for qualified expatriate plans (Pam Enright presenting)
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Legal and tax considerations and best practices for multinational employers
designing employee benefits plans
Jim Klein
Senior Counsel
Pillsbury Winthrop
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Types of Plans
• Defined benefit pension
• Defined contribution retirement
• Deferred compensation
• Health and welfare
• Long term incentives/equity
• Social security
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Basic Tax Considerations
• US citizens are taxable on worldwide income, without regard to source or residence
• US Green Card holders (permanent residents) are taxed just like citizens
• US residents based on physical presence (generally 183 days) are taxed just like citizens
• Nonresident aliens of the US are taxable on US source income only
• The source of compensation income is determined by the location of the services, not the location of the payor
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Domestic Tax Law and Tax Treaties
• “Domestic” tax law refers in our context to US tax law
• The US has income tax treaties with most major trading partners (big exceptions: Hong Kong, Brazil, all tax havens)
• Income tax treaties always cover (to varying extents) compensation (current and deferred) and pensions
• Health and welfare rarely if ever covered
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Compensation
• Assignee may be paid on home basis or local basis
• Assignee may be paid in home or host currency
• Based on HR values and philosophy, assignee may stay on home country benefits or host country benefits
• Some combination of these may exist (eg, host country compensation, home country pension)
• Split or “ghost” payroll may be necessary
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Compensation
Tax Issues • Generally, all compensation taxable by the US for US citizens (inpat
or expat) and Green Card holders (even if outside the US), and physical presence residents of the US
• For nonresident aliens, only US source income is taxable; there is a persistent myth that US source income only applies after staying in the US 183 days in a year (that is a treaty rule, with special requirements)
Planning Issues • Can the tax event be timed to avoid tax? • Which entity gets the deduction? • Which entity has to worry about withholding and reporting to the
US?
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Compensation
Key tax and legal characterization: Who is the employer? • US rules use a “20 factor” test, and may properly be
inconsistent with non-US rules, particularly in civil law jurisdictions
• In general, only the employer (using US rules) gets a valid US deduction
• Many benefit plans are limited to the employees of the sponsoring employer
• Immigration and “permanent establishment” practices should generally be consistent with benefit plan provisions and reporting and withholding
• Social security for the US must follow employment relationship
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Compensation
Practice of multinational employers
• Good practice is normally to have assignee (inpat or expat) employed by local company
• Sloppy practice is to take inconsistent positions on employment relationship
• “Secondment” has no place in a proper analysis of this key issue
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Defined Benefit Pension
• DB plans are mostly an “old time” employer issue these days for US companies
If a US expat stays in a US defined benefit plan, many issues:
• Do the DB plan terms provide for coverage?
• Who gets a usable deduction?
• Will the host country tax the individual accruals?
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Defined Benefit Pension
If an inpat to the US stays in home country plan, many issues:
• US domestic law treats all non-US plans as “nonqualified” and taxable when vested (if funded), not when paid
• The US employer will have complex reporting and withholding requirements
• Treaties often have provisions that avoid the tax, but with complex limitations and difficult reporting and timing issues
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Defined Benefit Pension
Multinational practices
• For outbound US, perhaps localize, but if not, be sure of pension plan coverage and check local taxation
• For inbound to the US, perhaps suspend participation
• Anticipate complex treaty relief
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Defined Contribution Retirement
• 401K plans are very popular, but for expats, serious practical issues on participation
• Administrators rarely provide for contributions based on non-US currency, although this can be handled manually
• Inpats in home country plan will generally be taxable, subject to treaty relief
• Short term inpat participation in a 401K will generate US source income indefinitely
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Deferred Compensation
• For expats, home country compensation may have elements of deferred compensation (bonus, executive pensions, savings); localized plans may give rise to “409A” issues
• 409A is the highly detailed tax rule on deferred compensation for US taxpayers
• Inpats or localized expats may run into 409A issues
• Good practice: avoid non-US deferred compensation plans and practices, with some limited exceptions
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FATCA
• FATCA is the “Foreign Account Tax Compliance Act,” massive legislation to find hidden US taxable income outside the US
• Think old-time Swiss bank accounts and tax haven holding companies
• US expats should not be eligible for off-shore retirement savings plans
• Some technical issues with insured health and welfare plans
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Long Term Incentives/Equity
• Strong multinational interest in maintaining such plans for inpat and expat groups
• Stock options for inpats can be a 409A problem • Stock options for expats can have complex tax
implications for individuals, and lost deductions for employers
• Stock grants and restricted stock can have mis-timed income – which can be good planning
• Carried interests/partnership profits interests can work in a multinational climate
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Social Security
• US social security covers all employee services inside the US
• US social security only covers services of US persons outside the US, and only if employed by an “American Employer”
• Frequently a source of inconsistent employer characterization
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Social Security
For multinational employers, the practice for social security is based on “totalization” treaties Totalization treaties: • Provide improved benefits for individuals • Avoid duplicative social security coverage for inpats
and expats Totalization treaties do not: • Provide coverage for expats unless valid US coverage
under domestic law (big exception: France) • Avoid local required social security for assignments
over five years
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Health and Welfare
• Historically, tax issues around these plans ignored; rules on taxable income exclusion for medical plans are murky
• Oddly enough, some FATCA issues here
• Competitive practices and compliance to be covered next…
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L O C K T O N C O M P A N I E S
Designing Compliant & Competitive Expatriate Benefits
Pam Enright, GPHR Director, Lockton Global Benefits
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Contents
Tailored Benefits (Table Stakes)
Compliance
Q&A
Benefit Options for Globally Mobile Employees
Closing Gaps, Concerns & Considerations
Trends & Factors
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Trends and Factors
Business
Statutory/ Compliance Population
Companies of all sizes are expanding into new markets.
Clarity and HR control of global benefit strategies supports compliance, admin and cost efficiencies.
Attraction and retention are crucial in most industries; offering competitive benefits supports both.
Duty of Care (moral/legal obligations of employers to maintain the well-being, security & safety for travelers and international assignees)
U.S. ACA regulations for U.S. expats and residents.
Many other countries have issued mandates for employer-sponsored plans and benefits; this trend will continue.
Not all insurers have capabilities to provide compliant coverage worldwide.
Changing workforce demographics demand new approaches to benefits.
Short- and long-term travel
Short- and long-term international assignments
Fewer career expats; increasing number of developmental assignments and regional staffing
Trailing dependents
Localization
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Cross-Border Benefit Options
Term Definition (from a US perspective) Type of Plans
International Business Travelers
Any employee traveling outside their home country for business purposes.
Cross-Border: Benefits policies designed for anyone working or traveling outside of their home country/country of citizenship
on a short- or long-term basis.
Examples: Business Travel Accident; Business Travel Medical,
Expatriate Benefits.
U.S. Expatriates
A U.S. citizen working abroad on assignment: Short-Term, Long-Term, Rotational, Commuters,
Students; Missionaries, etc.
Inpatriates An employee from another country on
assignment in the United States.
Third Country Nationals
(TCNs)
An expat of one country working in a second country for an employer in a third country, i.e. a
Canadian employee of a U.S.-headquartered company on assignment in Hong Kong.
Local Nationals (LNs)
Employees working within their home country/country of citizenship.
Locally Admitted: Benefits policies which are compliant with regulatory requirements of the specific country.
Key Local Nationals
(KLNs)
VIP local nationals, who may travel extensively for work purposes.
Either of the above, but non-local plans can create tax and legal
implications/liabilities.
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Closing Gaps for Global Travelers and Expats
BUSINESS TRAVELERS
(Typically <6 months)
Supplemental Coverage
EXPATRIATES
Typically>6 months
Replacement Coverage
Pension Home country retirement plan Home plan, host plan, offshore pension or stipend – consider payroll and tax implications
Life,
Accident,
Disability
Home country plan + supplemental business travel accident coverage
Home plan, host plan,
or global plan
Medical Home country plan + supplemental business travel medical coverage
(100%, 1st Dollar Coverage)
Global expatriate healthcare plan with connected locally compliant
plans where necessary
Other
Medical, security and natural disaster evacuation and assistance,
war risk
Medical, security and natural disaster evacuation and
assistance, war risk
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Gaps in employee benefit plans
Trailing dependents
Coverage limited within borders or regions
Accessing quality medical care,
understanding local healthcare system
Medical case management, claim
adjudication, member services
Compliance: admitted vs. non-admitted
policies, tax liabilities, etc.
Expatriate Concerns and Considerations
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Tailored Benefits & Services (Table Stakes)
Compliance solutions based on client’s legal structure, locations and demographics: contract options, plan designs, local fronting/administration
Global, comprehensive & consistent benefits
Good direct pay options
“White glove” service standards
24-hour customer service
International claim adjudication
International healthcare management
Specialized web resources & mobile apps
Comprehensive evacuation & assistance services
Ancillary coverage options: Life, AD&D, LTD
Compliance
TOP EMPLOYER CONCERNS
Complying with requirements for admitted coverage and visa regulations.
Offering competitive coverage while maintaining a consistent approach.
Selecting the right insurer partner based on unique needs (locations can make the difference).
Maintaining cost-effective coverage with leading insurers
KEY MARKET EXAMPLES
UAE (health insurance mandates in both Dubai and Abu Dhabi; work visa requirement)
Saudi Arabia (traveler visa requirement; new single policy requirement)
Australia (mandatory locally-sourced health insurance for AUS nationals/residents, Medicare levy applies if local insurance is not maintained)
Russia (local health insurance mandate for foreigners)
U.S. (ERISA, COBRA, HIPAA, PPACA)
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US Health Reform The Affordable Care Act
US Employers
US Insurers
US Citizens
Coverage Mandates
Tax Reporting
Individual
Exemptions
Foreign Employers
Foreign Insurers
Resident Aliens
Patchwork of US laws and regulations:
ERISA rules (1974)
ACA (2010)
Transition relief for expat plans (2013)
Expatriate Health Coverage Clarification Act (2014)
Global employer concerns are:
US business compliance with the employer mandate
Risk of foreign plan being subject to ERISA (therefore also to ACA and many, many other regulations)
Expats/inpats may be subject to individual mandate
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US Employer Mandate (key provisions)
Applicability
50 or more full-time equivalent employees in working in the US
Mandates
Affordable (no more than 9.69% of household income in 2017)
Dependents covered up to age 26 (if offered)
No dollar limits on key benefits
No pre-existing condition exclusions (must be MHD)
Etc.
Penalties & Subsidies
Subsidies for small employers and penalties for non-compliance
10 Essential Health Benefits
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Individual Mandate and Expatriates
Tax Penalty
For each month relevant individuals do not have Minimum Essential Coverage (MEC)
Tax penalty = greater of percentage amount or dollar amount
Tax Year % of
Income* Dollar Amount
Per Adult Per Child Family Cap
2014 1% $95 $47.50 $285
2015 2% $325 $162.50 $975
2016 2.5% $695 $347.50 $2,085
* The percentage of income above tax filing threshold penalty amount is capped at $2,484 per year for an individual and $12,240 per year for a family with five or more members.
Exemption
One short coverage gap of less than 3 consecutive months
Physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months
™™Bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
™Bona fide resident of a US territory (e.g., Puerto Rico)
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US Expatriate plan compliance
Expatriate Health Coverage Clarification Act of 2014 (EHCCA)
US expatriate plans can qualify for relief from some ACA requirements
Plan must meet specific coverage requirements
Insurer must meet specific licensing and operational requirements
Insurer must comply with IRS reporting requirements
Enrollees must be substantially all “qualified expatriates”
1. Expatriates outside the US—at least 180 days in a consecutive 12-month period.
2. US-bound inpatriates—transferred or assigned to the US on temporary assignment who need access to health insurance in multiple countries and who receive typical expatriate benefits
3. Students/missionaries/charity workers
Relief can help manage cost and provide flexibility in plan design
Easing of some coverage requirements
Exemption from some taxes and fees
Easing of some administrative requirements
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When Foreign Insurance Qualifies as MEC
Foreign group health plan if:
a. Individual physically absent from the U.S. for at least 1 day during the month; or
b. Coverage provides health benefits within the United States while the individual is on expatriate status.
Sponsors of plans intending to qualify as minimum essential coverage must
a. Provide notice to employees that the plan qualifies as MEC by inserting a statement into plan materials; and
b. Comply with the IRS reporting requirements with respect to those enrollees (Form 1095-B).
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Individual Mandate Expatriate Compliance Matrix
Citizenship Expatriate
Status Plan Situs Coverage Tax Reporting
US Citizen
Resident Alien
Localized Abroad
Foreign Plan Provides
Coverage in USA
Exempt or Employer Provides Tax Form for
Purposes of MEC
US Citizen
Resident Alien
Assigned Abroad
US (Expat) Plan
ACA (Expat) Compliance
Insurer/Employer Provide Tax Forms
US Citizen
Resident Alien
Assigned Abroad
Foreign Plan Provides
Coverage in USA
Exempt or Employer Provides Tax Form for
Purposes of MEC
Foreign Citizen
Resident Alien
Assigned to USA
Foreign Plan Provides
Coverage in USA
Exempt or Employer Provides Tax Form for
Purposes of MEC
Foreign Citizen
Resident Alien
Assigned to USA
US Plan ACA
Compliance Insurer/Employer Provide
Tax Forms
Foreign Citizen
Resident Alien
Localized in USA
US Plan ACA
Compliance Insurer/Employer Provide
Tax Forms
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What does the future hold after the election?
Repeal or reform the ACA?
Executive decision on Jan 20 or GOP-led legislation?
Guaranteed Issue for those with pre-ex?
Dependents to age 26?
…
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