Tax Implications of Remote Work: Cross-Border Pension Planning Challenges Under the U.S. Tax System
With the rise of remote work, cross-border employee mobility has increased, but participation in non-U.S. retirement plans may trigger U.S. tax reporting and payment obligations. ADP research shows that 43% of employees consider relocating overseas, and KPMG reports indicate that tax laws are a major challenge for cross-border remote work. Under the U.S. global taxation system, employers and employees need to be vigilant about compliance risks and consult tax advisors in advance.
Employees today have significant flexibility in where they live and work over the course of their careers, but when employees participate in non-U.S. retirement plans, employers face unique challenges under the U.S. tax system when sending employees to or receiving employees from the United States.
According to ADP Research Institute's "People at Work 2022: A Global Workforce View," 43% of surveyed employees are considering relocating abroad, and an equal proportion (43%) are considering moving to their country of nationality. ADP found that for nearly half of these employees, the move has already occurred or is underway. For many employees, this relocation coincides with critical years for their retirement savings.
At the same time, failure to comply with U.S. tax and reporting obligations can expose employers and employees to costly U.S. penalties. Additionally, U.S. citizens and residents saving for retirement through foreign pension plans should be aware that U.S. income tax requirements on plan contributions and benefits can erode the value of their savings over time.
U.S. tax issues related to employee participation in non-U.S. retirement plans typically arise when U.S. citizens or resident employees are assigned by their employer or self-initiate an assignment to work in a foreign country. Some countries require employers to provide local retirement benefits to employees working in that country, and even where not required, many employees choose to participate in foreign retirement savings plans for future benefit. On the other hand, foreign nationals assigned or required to work in the United States may continue participating in their home country's retirement plan, creating U.S. tax consequences.
Under U.S. tax rules, employees participating in non-U.S. retirement plans do not receive the same tax deferral benefits as employees in U.S. qualified plans. Unless specific exemptions are provided under the Internal Revenue Code or an income tax treaty, employer and employee contributions (and for certain highly compensated employees, earnings and capital appreciation within the plan) may be subject to tax to the employee each year, and may require the employer to withhold and report federal income tax.
KPMG's recent "Work from Anywhere" report, "Current trends in remote working," found that although 89% of surveyed companies have introduced or are considering introducing remote work policies, "tax and legal challenges are cited as a primary concern when introducing cross-border remote work."
The United States, in particular, presents unique tax challenges for companies seeking to implement remote and cross-border work arrangements due to its worldwide taxation system. In addition to creating U.S. income tax withholding and reporting requirements for employers, U.S. citizens and tax residents participating in non-U.S. retirement plans can increase overall employment costs, for example, when an employee is on a temporary work assignment and the employer has agreed to bear any increased tax costs associated with the assignment.
Non-U.S. employers are often surprised to discover that under U.S. tax law, they may be considered to have U.S. federal income tax withholding and reporting obligations with respect to certain employees even if they have no physical presence or business operations in the United States. From the employee perspective, U.S. citizens or tax residents may not realize that they may be subject to U.S. federal income tax (and possibly FICA tax and state/local taxes) on contributions, earnings, and capital appreciation within the plan, and this inability to defer U.S. income tax until retirement age can significantly reduce the long-term benefits of participating in a foreign pension plan.
Therefore, employers and employees should be sure to consult their tax advisors before entering into any form of international employment or "work from anywhere" arrangement. By reviewing the employee's individual circumstances, employment contract, non-U.S. retirement plan rules, and foreign tax laws, it may be possible to identify tax planning opportunities, such as using excess foreign tax credits to offset U.S. income tax, or determining whether any exemptions are available under U.S. domestic law or an income tax treaty.