ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in New Jersey focused on employee status. The advisor asked: “My client is being offered a Secondment Agreement for working overseas. What is that and how will it affect his ability to continue to participate in his 401(k) plan?”
Highlights of the Discussion
Let me first say that because secondment agreements involve very important and intricate tax and legal questions, your client should seek guidance from a tax professional and/or attorney who specializes in this area for his/her particular case.
In very general terms, a secondment is a written, legal agreement that allows an employer to assign an employee to work for another organization, usually outside the U.S. In a secondment arrangement, the outbound employee is loaned (or “seconded”) to a foreign entity, but remains the common law employee of the U.S. employer. It is not unusual for a U.S.-based company with international affiliates to temporarily transfer its U.S. workers to a foreign subsidiary (or other affiliate) pursuant to a secondment agreement. Generally, the foreign entity is obligated to reimburse the U.S. employer for the compensation the U.S. employer pays to the overseas employee under the secondment agreement.
In many cases, the employee with a secondment arrangement is considered an “expatriate,” a U.S. employee who works overseas on a foreign assignment. The expatriate assignment can be structured in several different ways and may be for a fixed or indefinite duration.
The secondment agreement should identify who will manage the day-to-day activities of the seconded employee as well as a multitude of other employee compensation and benefit issues, including whether the loaned employee will be able to continue to participate in the U.S. employer’s tax-qualified retirement plan, a foreign retirement arrangement or both and what compensation will be used to determine contributions.
Typically, but not always, a secondment agreement provides that a seconded employee:
- Remains on the U.S. company's payroll,
- Receives compensation that is subject to U.S. federal employment taxes,
- Is the common-law employee of the U.S. company, and
- Continues to be covered under both the U.S. company's benefit plans and the U.S. Social Security system.
But keep in mind that there are always exceptions, so a thorough review of the written agreement is imperative. Plus, your client may have a say in what terms are incorporated. [1]
Conclusion
Secondment employment agreements involve very important and intricate tax and legal questions, which should be reviewed by the employee’s tax and/or legal counsel. The written secondment agreement should address employee compensation and benefit issues, and the types of retirement arrangements in which the employee can participate.
Any information provided is for informational purposes only. It cannot be used for the purpose of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2023, Retirement Learning Center, LLC. Used with permission.
