McDermott Will & Emory has a summary of the provisions for non-U.S. retirement plans in the allegedly-final FATCA regulations. While the regulations for banks provide incomplete protection for U.S. persons abroad by forbidding only “local FFIs” and not other categories of FFIs from discriminating against us, the regulations applying to retirement plans are even worse.

Narrow Participation Retirement Plans. A non-U.S. retirement plan established to provide retirement, disability and/or death benefits for its current or former employees and designated beneficiaries will be exempt from FATCA if these qualifications are met:

• The plan has fewer than 50 participants.
  
• The plan is sponsored by one or more employers that are not investment entities or passive non-financial foreign entities.
  
• The plan is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in its home country.
  
• Participants not resident in the plan’s home country are not entitled to more than 20 percent of the plan’s assets.
  
• Employee and employer contributions to the plan (other than transfers from certain retirement savings accounts or other exempt retirement plans) are limited by reference to earned income and compensation, respectively.
  

As should be obvious to anyone besides an IRS bureaucrat or Congressional demagogue screaming about “wealthy people fleeing the country with ill-gotten gains”, an employer has no control over its employees’ decisions to leave the country in which the retirement plan is established — least of all after those employees have become former employees — but employees often retain an interest in retirement plans until their retirement, even after leaving the company which set up the plan. This is of particular concern in small countries where temporary expatriation to work overseas for a few years is a matter of course for any ambitious young person, as well as in industries which often bring in large numbers of non-local employees for short-to-medium-term assignments.

The most obvious preventative measure a small business can take to keep its retirement plan from losing its FATCA “narrow participation” exemption — and having to bear the full cost of compliance — is to avoid hiring people who might show a high propensity to emigrate in the future. The most obvious category of such people: immigrants and dual citizens, not just Americans but people of any nationality or background not indigenous to the country of the retirement plan. Even religion could affect hiring decisions: after all, a potential Jewish hire might one day decide to make aliyah to Israel, a Rastafarian might move to Ethiopia, and indeed a person of any minority religion might want to raise his future children in a country where that religion is in the majority — better to send them all rejection letters so there’s no possibility they’ll count towards the 20% in the future.

In my case, I have an interest in a Hong Kong retirement plan in which well over half of the participants no longer reside in Hong Kong. The head office had a habit of hiring former Hong Kong residents who had settled overseas and sending them to the Hong Kong office (where they didn’t need work visas) for rotations of a couple of years before sending them to other offices — and since they were right-of-abode holders who had already emigrated from Hong Kong once, they couldn’t withdraw their retirement assets when leaving Hong Kong for the second time. And when they finally closed the Hong Kong office, at least a third of the staff were offered positions in other Asian and European offices.

Of course, facing up to full FATCA compliance is a much less scary prospect for a retirement plan if the plan administrators are certain that it has no U.S. Person participants, so the easy way around this is simply to avoid hiring any Americans, and to harass the ones you already hired into to quitting and cashing out their plan interests.