401k questions

TcpnT

Let me start by saying that this is one of those posts in which I know so little about the subject that I am not even sure what questions to ask. I will explain the situation and would welcome any relevant input.

I am an executor for a relative who died recently aged 56. He was a UK citizen and never worked in the USA. Whilst going through his paperwork I came across a statement for a company retirement / profit sharing plan from 1994. At that time he was working for a US company in various European countries and appears to have been on the US payroll. The statement shows around $9000 in a 401k plan at that time. There are no other statements that I can find and no clue what happened to this after 1994.

Some questions come to mind:

1. Is a 401k run by an employer or is it a government scheme?

2. Does a 401k plan continue to exist after you leave employment with the original company?

3. How can I find out whether the account still exists?

4. Can the estate of a UK citizen collect the balance of a 401k in the USA and how would one go about doing this if it is possible.

5. What else should I be asking? Can anyone recommend any other relevant forums or sources of information?

Any advice or information would be helpful. Thanks

bostonerimus

TcpnT wrote: »

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Some questions come to mind:

1. Is a 401k run by an employer or is it a government scheme?

It's a company defined contribution scheme. They are usually administered by a financial company like Fidelity, Vanguard etc.

2. Does a 401k plan continue to exist after you leave employment with the original company?

Yes.

3. How can I find out whether the account still exists?

Call the administrator

4. Can the estate of a UK citizen collect the balance of a 401k in the USA and how would one go about doing this if it is possible.

Yes, call the 401k administrator.

5. What else should I be asking? Can anyone recommend any other relevant forums or sources of information?

Any advice or information would be helpful. Thanks

Ask here
http://talk.uk-yankee.com/index.php?board=11.0

OldMusicGuy

I worked in the US for three years in the 90s and have just collected my 401k funds. So the beneficiaries on the account should be able to collect the funds. If these have been invested, they will be worth more than $9,000.

Like Bostonerimus said, you need to contact the scheme provider in the first instance. However, you may find that the 401k no longer exists. It could have been "rolled over" into an IRA (individual retirement account) with another provider. This happened to mine when the original firm went bust. Don't worry if this has happened, an IRA is pretty much the same as a 401k. The 401k provider should be able to give you full details of this if it happened.

The beneficiaries will have to decide how to withdraw the funds. If they take it as a single lump sum, it will be subject to US Tax. The provider will deduct 30% withholding tax and the beneficiaries will need to complete a US tax return to get some of the tax back, as the tax payable will not be 30%. If they take it as several regular payments over several years, it will be subject to UK tax and needs to be reported on their UK tax return. No tax would be payable in the US.

bostonerimus

OldMusicGuy wrote: »

The beneficiaries will have to decide how to withdraw the funds. If they take it as a single lump sum, it will be subject to US Tax. The provider will deduct 30% withholding tax and the beneficiaries will need to complete a US tax return to get some of the tax back, as the tax payable will not be 30%. If they take it as several regular payments over several years, it will be subject to UK tax and needs to be reported on their UK tax return. No tax would be payable in the US.

Just a quick note. Be careful with the tax situation. 401k distributions to non US citizens resident in the UK are usually only taxable in the UK....but it this is a lump sum distribution then tax will be payable in the US.

OldMusicGuy

bostonerimus wrote: »

Just a quick note. Be careful with the tax situation. 401k distributions to non US citizens resident in the UK are usually only taxable in the UK....but it this is a lump sum distribution then tax will be payable in the US.

Which is exactly what I said.....;-) I have just been through all this with my IRA withdrawal, have read the HMRC guidance and been all over various forums that discuss this.

Under the UK/US tax treaty, lump sum withdrawals are taxable in the US, but regular disbursements are taxable in the UK, treated as income from pensions. You specify to the 401k/IRA provider whether you want "periodic" or "non-periodic" withdrawals.

This was changed a few years back, because lump sum withdrawals ended up being non-taxable either in the US or the UK, so they clarified things to make sure all withdrawals by UK citizens were taxed somewhere.

For me, as the IRA was worth about $40K and was my only US income, it would be better to have this taxed in the US at a relatively lower marginal rate than I would pay in the UK. I also don't want additional taxable UK income, as I am trying to maximise tax free withdrawals from my DC pot.

You will get hit with a 30% withholding tax on a lump sum withdrawal, because all payments to non-US nationals are subject to this withholding. I tried to get out of this but it's not possible and will have to submit a US tax return to claim back the excess tax. This is annoying but not that complex, although I haven't so far tried to claim anything back from the IRS when I have been living outside the US. So let's see how that goes...

However, you can avoid the 30% withholding tax on periodic withdrawals to the UK because they are covered by the double taxation treaty which states they will be taxed in the UK. You have to cite this treaty provision on the request for withdrawal where you can elect to avoid withholding. Be aware that the compliance team at your 401k/IRA provider are likely to be confused by this and you will need to be prepared.

HMRC guidance is here: https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876a

EdSwippet

TcpnT wrote: »

4. Can the estate of a UK citizen collect the balance of a 401k in the USA and how would one go about doing this if it is possible.

Once you identify the 401k provider and/or sponsoring employer (if still in existence!), the "how" here may well involve a US non-resident alien estate tax return, form 706-NA. US brokers usually freeze non-resident accounts until they get notification from the IRS that any US estate tax has been cleared. There will not be any due at the dollar amount you are talking about, but the provider may (have to) hold until the paperwork circle is completed.

Form 706-NA is fiddly, but not impossible to do yourself -- I have done one -- so with a bit of work you can probably save a likely rather pricey professional fee here. It will not be easy finding an accountant in either the US or the UK who is well acquainted with US non-resident alien estate tax filing. If you have to complete a form 706-NA you will need to cite bits of the US/UK estate tax treaty (treaty technical explanation is here).

OldMusicGuy wrote: »

You will get hit with a 30% withholding tax on a lump sum withdrawal, because all payments to non-US nationals are subject to this withholding. I tried to get out of this but it's not possible and will have to submit a US tax return to claim back the excess tax.

Which provider? Go on, name names! Anecdotally(*), Fidelity and TIAA-CREF seem to be useless here. My experiences with Vanguard, on the other hand, have so far been okay.

(*) Of course, one of the just two or three anecdotes on this I have seen elsewhere could well be your's, just under a different alias.

OldMusicGuy

EdSwippet wrote: »

Which provider? Go on, name names! Anecdotally(*), Fidelity and TIAA-CREF seem to be useless here. My experiences with Vanguard, on the other hand, have so far been okay.

John Hancock (the pensions company, not the historical figure...). Help line people were completely clueless, my application for withdrawal just went into limbo. They said the compliance team had held it, when I asked why, they said "they don't talk to us". So much for legendary US customer service (they still hoped I had a nice day though....) Had to whinge and complain to get someone from management involved who, to be fair, then helped sort things out.

EdSwippet

OldMusicGuy wrote: »

John Hancock (the pensions company, not the historical figure...).

So I now count three US pension providers failing to apply the treaty. That is a rather depressing trend. Worse is some reports of US providers kicking out non-resident customers entirely. Bad enough on a taxable account, but truly dire on a 401k or IRA. For this, we can all thank overbearing US tax regulations, and no sign of improvement on the horizon as far as I can see either.

My own experience with Vanguard has been okay. My impression at times has been that they do not know the rules until I cite the relevant sources -- or at least, the sources that it suits me to cite! -- but at least they have not been obstructive. Having a decently sized balance in a megacorp 401k probably helps too -- I have a personal and nominated account rep to bother on these things.

I have around a decade more to wait until I will want to really draw on this 401k. By that time, heaven knows what new hurdles and restrictions will have been put in place. It is quite easy to imagine a time when withdrawing from a 401k requires a 'medallion signature guarantee' or similar, that can only be accessed by an in-person visit to some US office. And then some US visa restriction that makes travelling to the US difficult or even impossible.

Overall, having a pension held hostage in a foreign country a deeply uncomfortable experience. If I had my time over again I might think very carefully before opening one. Of course, what with virtually annual reductions in pension allowances and an ever-changing regulatory landscape, a UK pension is not exactly a consistent and smooth experience either.

bostonerimus

EdSwippet wrote: »

Which provider? Go on, name names! Anecdotally(*), Fidelity and TIAA-CREF seem to be useless here. My experiences with Vanguard, on the other hand, have so far been okay.

(*) Of course, one of the just two or three anecdotes on this I have seen elsewhere could well be your's, just under a different alias.

That's my experience too. Vanguard are clued in, or at least can be clued in if you know what you are talking about, but TIAA-CREF just ignore the treaty even when you claim reduced withholding. They just withhold the 30% and you have to claim it back.....except if you have an annuity.

TcpnT

Thanks for all your replies. Sounds like like I need to pursue this even though it's going to be a minefield.

A few more questions if you don't mind:

- Is it possible that he cashed in the plan when he left employment with that company or can a 401k not be accessed before retirement?

- Would it be necessary for the the administrators to have details of a beneficiary on record in order to pay out? He was married at the time and his wife (the same one) is the sole beneficiary of his will but I don't know whether he would have got round to nominating her at the time.

- Is a payout likely to require probate (confimation as he lived in Scotland)?

- The statement I have only carries the name of the employer. There is no mention of an administrator for the plan. The company has been taken over a couple of times since then though. Any ideas on how to track down where the plan might be held? The statement does have a US social security number - would there be any way to track it down via that?

On a different but related subject he also held a couple of small stock accounts in the US with Equiniti and Fidelity. There had been a lot of money held until recently when he withdrew it for a house purchase. Remaining amount is now about $1400 between the two. I have been in contact with Equiniti who sent forms and a request for ridiculous amounts of supporting paperwork in order to transfer the account to his wife. It would also require a medallion guarantee stamp which I understand will cost at least £400. On the basis of this information I have decided that it is not worthwhile to even attempt to retrieve this money. I have not contacted Fidelity but I assume they will have similar requirements. Has anyone else had experience with this? Do you agree with my assessment that it will not be worth the time, cost and effort.

bostonerimus

It's possible that the 401k was cashed in or that it was transfered to an IRA. You will have to contact the employer if you can't find any other administrator. The SSN will be useful to identify records.

In the US 401ks with named beneficiaries don't go through probate, but I don't know how Scotland will deal with it.