Reintegration to the home country benefit scheme
As indicated in our recent survey on the impact of COVID-19 on global mobility, many companies have repatriated their assignees given work stoppage and/or safety concerns in the host locations. As a result, some of these assignees are now back to their pre-assignment home country arrangement, including their home benefit plans.
Typically, the reintegration to the home country benefit scheme such as retirement funds would be a non-issue if the assignee has remained on the home payroll during the assignment as the employer would be able to continue to fund the home pension/retirement. However, what if the assignee has been placed on the host payroll during the assignment? This was the situation for one of our clients in APAC, and they wanted to know how other companies would manage international assignees’ retirement benefits during the assignment to ensure continuation with the home plan.
Why would you place an assignee on host payroll during assignment?
The reason this client decided to place their assignees on host payroll was to avoid risks of permanent establishment and corporate tax liability for the sending company in the host location. That required a formal change in employment relationship for the employee as the assignee was no longer an employee of the sending company and began a new employment relationship with the receiving company. The receiving company already had a corporate tax presence in the host country.
For the assignees’ home retirement benefits, the firm would continue to pay the contribution to the assignees’ fund accounts in the form of an annual lump sum, considering the annual dividend rate declared by the government. While we have seen this approach by other companies from time to time, it has a downside of not being able to spread risks or growth on the retirement fund across the year.
In rare cases, we have also seen companies calculating the value of the retirement contributions as if they had been invested monthly, so that the assignees would receive the correct values (gains or losses) in the funds. However, this could be problematic as the contribution, when applying an investment loss, may not match the amount that the employer had committed to pay.
The other significant downside to the lump sum approach for providing retirement benefits is that the payment is generally taxable to the employee at the time of payment and thus doesn’t enjoy the advantage of a ‘pre-tax’ contribution to a qualified retirement scheme. Only the lump sum after-tax is available to fund future retirement needs.
Other retirement funding approaches
In addition to the aforementioned methods of continuing participation in home retirement plans, we are aware of other practices under this situation:
• Split or shadow payroll between the home and host countries – this approach can allow continuity of home benefit participation while ensuring compliance in home and host countries; however, the arrangement may trigger some corporate tax risk and complicate the payroll administration for the assignee, as similar payroll activity needs to be reported in two tax jurisdictions.
• Host payroll with home country payroll in hibernation – this approach can provide an implicit guarantee of continuing employment at home and participation in the home benefits while keeping the assignee on full local payroll in the host country. It is especially important to confirm that the employee on host payroll continues to be a qualified participant in the home country scheme which may require a legal analysis of the pension plan documents. Additionally, the assignee may have contractual rights in both home and host countries, which can complicate other matters such as termination.
• Enrollment in an international pension fund – this approach generally is used as a back-up when there is no viable way to continue contributions to the home pension/retirement fund. With this option, companies may involve a global employment organization to help facilitate the plan, but generally do not provide any tax benefits.
Weighing the pros and cons of home country retirement funding
All options have their advantages and disadvantages, and no single method is optimal in every situation. The decision will depend on not just the assignee’s benefit portability, preferences, and employment relationships, but the company’s presence and commitment to the host country as well.
One key factor is determining the likely location of retirement for that employee. Generally speaking, if there is an expectation that the employee will return to the home country to retire, most companies will look for ways to continue participation in his/her home country pension scheme. This is easier to implement where there are payroll arrangements in place for the employee in the home country to facilitate pension contributions or a split payroll arrangement is available that can provide for the contributions.
If you would like to discuss any of the methods above in detail or share your approach with us, don’t hesitate to reach out to your client engagement representative at AIRINC!
Listen | Partner | Deliver. For over 60 years, AIRINC has helped clients with the right data, cutting-edge technology, and thought-leading advice needed to effectively deploy talent worldwide. Our industry expertise, solutions, and service enable us to effectively partner with clients to navigate the complexity of today’s global mobility programs. As the market continues to evolve, AIRINC seeks innovative ways to help clients address new workforce globalization challenges, including mobility program assessment metrics and cross-border talent mobility strategy. Our approach is designed with your success in mind. With an understanding of your goals and objectives, we ensure you achieve them. Headquartered in Cambridge, MA, USA, AIRINC has full-service offices in Brussels, London, and Hong Kong. Learn more by clicking here.