Previously, we published PART I, II, and III of our series, Going Global: A Review of Critical Issues of Executive Mobility. Here is Part IV, another issue to consider when developing a Global Executive Mobility Strategy:
Employee Benefits and Executive Compensation Issues – Generally, companies seek to maintain continuity of benefit coverage and parity of compensation for assigned executives in relation to similarly situated home country executives . So, for example, participation and vesting credit in home country social security programs, company pension plans, health and welfare programs, as well as existing equity and long-term incentive programs, should be maintained and continued where permitted by law and by the specific terms of the applicable plans and programs. Regarding continued participation in the U.S. Social Security system, U.S. law generally requires social security contributions to be paid on the earnings of a U.S. citizen or resident alien who is working for an U.S. employer anywhere in the world. An American employer could include a foreign division, subsidiary, or branch of a U.S. employer, where such branch is “a mere extension of the U.S. employer.” Therefore, wages paid would be subject to FICA withholding. Also, an American employer can enter into a voluntary agreement to continue coverage under Social Security for U.S. citizens who are employed by a foreign affiliate, which is at least 10% owned by the American employer), or when a US employee is “seconded” to a foreign employer, but the U.S. company retains the right to “direct and control” that employee.
In the event that continued participation in home country plans and programs is not an option, some arrangement providing a roughly equivalent value proposition should be developed. Related issues to be considered in developing this alternative include the length of the assignment, the countries involved, the proposed employment structure, and whether the executive will return to his or her home country following termination of the assignment. As part of such alternative arrangement, a U.S. executive may become a participant in host country compensation or benefit program. Such participation may lead to adverse U.S. tax consequences, particularly related to Internal Revenue Code Section 409A, dealing with Deferred Compensation Plans. These rules are extremely complex and apply to all types of deferred compensation plans and programs globally that have U.S. citizens participating therein. Generally, Code Section 409A requires compliance with various rules regarding the timing and form of payment and the timing of certain deferral elections made, unless exemptions apply. “Deferred Compensation” is defined broadly to include equity incentive and long-term incentive plans that pay over several years. Code Section 409A does contain exclusions for certain Foreign Plans that meet 409A rules. Also, there may be potential 409A concern regarding tax equalization payments made over a number of years, where the payments would be considered a form of deferred compensation. In addition, Section 409A may also be applicable to a non-U.S. executive taking an assignment in the U.S. Participation in home country benefit and equity compensation plans which do not meet the specific 409A requirements could potentially have an adverse impact on the executive, unless those plans are modified to comply with Section 409A prior to his or her becoming subject to U.S. taxation. Because of its adverse and potentially serious impact, the applicability of Section 409A needs to be thoroughly researched and understood as it applies to the broad spectrum of compensation and benefit plans and programs which the executive may participate.
There are a multitude of issues that need to be considered in connection with the development of a Global Executive Mobility Strategy and a whole host of legal, tax, accounting and immigration law implications. This series of posts will highlights major issues to consider and suggests several potential Best Practices. However, this series is by no means exhaustive, comprehensive nor complete. The author strongly urges anyone involved with these issues to consult with qualified legal and tax counsel before committing to any course of action.