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March 30, 2022

Canadian Companies Doing Business in the United States: Compliance Tips and Traps

Under US employee benefits law, US companies that are under common control are treated as a single employer for many purposes. “Common control” businesses include parent-subsidiary ownership structures and brother-sister companies (i.e., two or more companies owned by the same five or fewer persons).

The following are the most important purposes for which US companies that are under common control are treated as a single employer:

1)    401(k) and pension plan tax rules that prohibit discrimination in favor of “highly compensated employees”

Under US tax law, qualified retirement plans maintained by US businesses must be designed in a way that does not disproportionately benefit owners and executive employees relative to the rest of the workforce.

Example

Acme, a Canadian company, has two US subsidiaries. Each subsidiary maintains a separate 401(k) profit sharing plan. The employees of one subsidiary are largely highly compensated and have very robust benefits, whereas the employees of the other, most of whom are not highly compensated, receive benefits of a lesser value. 

In determining whether the benefits are being fairly distributed among the employees of the US subsidiaries, the IRS disregards the separate status of the subsidiaries and aggregates the employees and plans to determine whether highly compensated employees receive significantly better benefits when the benefits delivered by both plans are considered.

Action Steps

If a Canadian company has separate subsidiaries or business lines within the US and provides different retirement plan benefits to the employees of each of its US subsidiaries or lines of business, it needs to be sure that it is not discriminating in favor of US employees who are considered highly compensated under US tax law. Failure to ensure that US benefits are distributed in a nondiscriminatory manner can be quite costly.

2)    Statutes, regulations, and court cases that hold all US companies that are part of a group of businesses that are under common control financially responsible for pension liabilities incurred by any one or more of the members of the US-controlled group

Under US law, each US company that is part of the controlled group is jointly and severally liable for the following liabilities, among others:

  • Multiemployer Plan Withdrawal Liability
    If a US company is a party to a collective bargaining agreement that requires the company to make contributions to a union pension fund on behalf of union employees, that company and each of its controlled group members are jointly and severally liable to the union fund if the company “withdraws” from the union fund (i.e., ceases to have an obligation to make contributions the plan). The withdrawal liability rules are designed to prevent employers from pulling out of union retirement funds to avoid paying for their share of any funding shortfalls, leaving that share to be paid by the contributing employers who remain.
  • Lien for Missed Minimum Funding Contributions
    If a US company sponsors a defined benefit pension plan for its employees, union or non-union, and the company fails to make the minimum contribution required by law, a lien arises in favor of the plan when delinquent contributions exceed $1 million. The lien is imposed on all of the property of the plan sponsor and all members of the plan sponsor’s controlled group.
  • Plan Termination Liability
    Another lien associated with liabilities arises if a single employer pension plan is terminated without sufficient assets to fully fund the benefits that are owed. This lien is imposed on all property and rights to property, whether real or personal, belonging to the plan sponsor and all members of its controlled group. The lien arises as of the date of plan termination. For planning purposes, it is important to know that the controlled group is determined as of the date of plan termination. 
  • Delinquent Contributions to a Union Fund
    All members of an employer’s controlled group are jointly and severally liable if any one or more members is delinquent in the contributions owned to a union pension fund.

Action Steps

Canadian companies with US operations should identify the pension and union plans maintained by their US affiliates and review the plans with the goal of evaluating and mitigating (or eliminating) the joint and several liability risks.

3)    Can a Canadian company be held financially responsible for the union fund and pension liabilities of one or more of its US affiliates?

As noted, every member of an employer’s controlled group is jointly and severally liable for many types of pension liabilities if the contributing employer does not pay. The law does not explicitly limit controlled group liability to companies based in the US, so it is possible that these liabilities can become liabilities of a Canadian company. The good news is that courts in the United States cannot exercise jurisdiction over foreign entities if the foreign entity does not have sufficient contacts with a US jurisdiction. The case of GCIU-Employer Retirement Fund v. Goldfarb Corp1.  involved an attempt by a US union pension fund to collect withdrawal liability from a Canadian parent company. In GCIU-Employer Retirement Fund v. Coleridge Fine Arts2,  a union pension fund filed suit against two Irish companies to collect a withdrawal liability assessed against a defunct US controlled group member when the US controlled group entities failed to pay the liability. Both cases were dismissed due to lack of personal jurisdiction, finding that the Canadian and Irish companies did not have sufficient contacts with the United States.

Action Steps

While the success of withdrawal liability and other pension claims against foreign controlled group entities is not clear, Canadian companies should be aware of the potential liabilities within the US controlled group. Foreign corporations that have US affiliates that sponsor or contribute to defined benefit pension plans should evaluate the funded status of those plans, identify and evaluate the extent of their own contacts within the United States, and assess the risks of joint and several liability.

Barclay Damon provides comprehensive, practical, and effective advice on a full spectrum of employee benefits and ERISA matters. We regularly help Canadian companies doing business in the United States identify, prioritize, and minimize the liability risks associated with the management and administration of employee benefit programs for their US workforce. 

 1 565 F. 3d. 934 (7th Cir. 2009).
 2 808 Fed. Appx. 655 (10th Cir. 2020).
 

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