A Canadian citizen works in Ann Arbor, Michigan, for a U.S. company. May this individual participate in the company’s 401(k)?

Rev. 11/17/05, E-mail Alert 2005-23

Background
Qualified plans may exclude nonresident aliens (NRAs) who have no US source income from the coverage test. This is often referred to as one of the statutory exclusions which all qualified retirement plans (including standardized prototype plans) may utilize. The term “statutory exclusion” refers to the fact that NRAs are specifically allowed to be excluded from plan participation by a statute of law, specifically, Internal Revenue Code Section 410(b)(3)(C)*.

Thus, a plan may exclude NRAs by this statute without having to include them in the coverage test. However, if a plan document provides, a plan may include NRAs if the employer desires to cover them.

FAQ Answer
As to the original question, the individual is a Canadian citizen who works in the US and commutes across the border daily from Windsor. Since the individual works in the US and has US source income, the answer is yes. The individual may participate in the plan and may not be excluded as an NRA as the individual has US source income. Note that the employer could create an exclusionary class for this geographic category of employees; but the employer’s plan would have to pass the coverage test with those employees included.

Note that IRS Publication 519 provides guidance on aliens and NRAs.

* Code section 410(b)(3)(C):
“3. Exclusion of certain employees. For purposes of this subsection (which is the coverage test subsection of the Code) there shall be excluded from consideration ---

(C) employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3).”