Many U.S. ESOP companies have employees in other countries, but almost all of the literature on sharing ownership with non-U.S. employees focuses on issues for large public multinational corporations. This issue brief is the exception. It discusses how an ESOP company in the U.S. can extend its own ESOP abroad or use equity alternatives such as phantom stock, stock appreciation rights, restricted stock, ESPPs, or international trust plans. Appendices summarize legal and other issues for selected countries, provide IRS comments on international benefit plans, and outline how to implement a global stock plan.
Table of Contents
Sharing Ownership Internationally
General Design Issues
Organizational Structure Issues
The Phantom Stock Alternative
Stock Appreciation Rights
Employee Stock Purchase Plans
The Daymon Worldwide ESOP
International Trust Plans
The H.B. Fuller Plan
Appendix 1: Tax, Securities, Labor, and Data Privacy Issues for Selected Countries
Appendix 2: IRS Comments on Multinational Benefit Plans
Site and Operation of the Trust
Employee Eligibility Rules
Section 415 Contribution Limits
Contributions to the Plan
Appendix 3: Implementing a Global Stock Plan
Determining Your Team
Determining the Administration
From "The Phantom Stock Alternative"
By far the most popular approach for ESOP companies to share ownership abroad has been to use phantom stock awards, although it may be a good idea to call them something else. "Phantom" is not a word that inspires confidence. The term also has no specific legal definition, so any term can be used. You could, for instance, call it a unit plan, a share tracking plan, a share equivalency plan, or an equity rights plan.
This section looks in detail at the issues raised by using these plans internationally, including tax, securities, labor, currency exchange, and data privacy concerns. These same issues will come up for all plans in different ways. Because it seems easier to understand these complex rules with application to an example of a plan, the discussion begins with phantom plans, the most common approach, and refers to how these rules apply to the other plans in subsequent sections.
From "Sharing Ownership Internationally"
One major concern companies have about setting up an ESOP, or any other qualified ERISA retirement plan, for international employees is whether there will be problems with discrimination testing. However, this should not present a significant barrier. Section 410(b)(c)(3) of the Internal Revenue Code (the "Code") specifically allows nonresident aliens to be excluded from the plan. Note, however, that some employees outside the U.S. may not meet this rule if they are deemed to have U.S. source income under tax treaties. Nonresident aliens can be included, however, as Private Letter Ruling 8144028 indicates. Rules for international employees specifically allow for countries to be excluded and for each country to have its own ESOP as long as the rules within it are not discriminatory. There can be different contribution levels as well as allocation, vesting, and distribution rules for each plan as long as they are not discriminatory within the plan in the same way these rules would apply in the U.S. (for instance, allocations cannot favor highly compensated employees more than a relative eligible pay formula would). In text from a 2011 Webinar provided in appendix 2 below, an IRS representative discusses international retirement plan qualification and compliance testing issues.