Managing the employee impact of USAID funding cuts

Recent announcements from the Trump administration have triggered major changes at the State Department with dramatic cuts made to USAID funding. The impact of cuts in international aid funding will be felt across not-for-profit organizations that are currently funded by USAID, whether in part or full. 

U.S. non-profits should make sure they can clearly identify which employee positions are funded by USAID so they know the scale of the impact. Furthermore, organizations should develop contingency plans now for USAID-funded individuals so that adjustments can be expedited in light of political developments. Projects underway internationally could see funding run out and leaders of these organizations are responding to the immediate implications of how to address the developments. 

Many U.S. non-profit organizations operate internationally, with U.S. employees working around the globe on assignments or as local employees (including those with “third country national” (TCN) employment arrangements. If their projects are no longer financially viable, U.S. employees face being furloughed creating complexity and uncertainty for how benefits may be provided or ended.  Meanwhile overseas employees may have to be repatriated to the U.S. or relocated to a different country. Employees working in the U.S. temporarily, such as those on trainee or student visas, may also need to relocate home. Such relocations come at a cost and tax is another cost variable that will need to be managed. Effective tax planning and avoiding pitfalls that could trigger tax costs will be keys to managing remaining budgets.

The below summarizes some important considerations that could affect the tax costs for relocating overseas employees and U.S. employees.

1. The impact on U.S. employees

For many organizations, furloughing employees may become a necessity as funding ends. For those affected, it is important to determine the impact on employee benefit programs and to develop a strategic plan to address coverage, costs and alternatives. Plan amendments may be required to address an employer’s goals and objectives.  In addition, those employers need to communicate available benefit offerings, cost and payment options and timeline.

• For health plans, furloughed employees may be eligible to continue their benefits as if they were active employees. However, employee contributions will need to be addressed. If furloughed employees are no longer eligible or decline coverage, they may be able to enroll in COBRA, a spouse’s plan due to a qualifying life event, or a plan offered through the state or federal marketplace. Employers will need to send all mandated and required notices.
• For retirement plans, organizations should also communicate the furlough’s impact on the retirement plan participation such as participant loans, hardship withdrawals, and other plan provisions. Organizations can consider amending their plan to meet their goals and objectives.

Beyond plan benefits, employees may continue to need support during furloughs. This may be increasing employee communications and reminding employees of mental health benefits available under the organization’s medical plan and employee assistance program (EAP), if available.  

2. Closing out overseas taxes

When an employee leaves a country, closing out the payroll is key. For employees paid via U.S. payroll, ceasing local reporting of income and tax remittances will mitigate “tax leakage.” Countries including India and Kenya for example may treat income reported in error as taxable and so any overpayments of tax made after an employee has left the country may be challenging to recover from the tax authorities.

An affected employee also will need to finalize their personal taxes following their repatriation, potentially requiring deregistration with the tax authorities and filing a final tax return. Timing of such filings and tax payments remains important to allow U.S. employees to claim tax credits and not be double taxed.

3. Availability of expat tax reliefs 

U.S. employees working overseas have a number of approaches to most effectively manage their tax burden, both for federal and state taxes. For federal tax, an individual may elect to exclude all or a portion of employment income (up to $130,000 in 2025) from tax, a relief known as the Foreign Earned Income Exclusion (FEIE). The qualifying tests for the FEIE require an employee to be a resident of a foreign country for a complete tax year, or spend 330 days or more there in a 365-day period. Employees who are repatriated before meeting either of these criteria will not be eligible for the exclusion, which has the potential to increase the overall tax burden they expected to incur.

Similarly, some states allow employees to be treated as not resident for tax purposes while working overseas and therefore not taxable on the employment income earned during their international role. New York and California, for example, assess this over 548-day and 546-day qualifying periods, respectively, and so any employee repatriating before they meet this time period overseas could remain a tax resident and liable to tax on all income and benefits earned while outside the U.S. As many states do not allow a credit for the tax paid overseas, this could significantly increase the employee’s tax burden.

Not all relocations will be repatriations and there may be the opportunity for employees to be redeployed to a new location. Though many countries have removed or reduced tax reliefs for international employees or NGO employees specifically, those that remain could allow for employees to move to a country that has a favorable tax regime. In doing so, these employees could continue to work to support the organization’s mission without incurring a large tax cost.

4. The tax costs of relocating employees

Since 2018, relocation benefits provided by an employer such as flights, accommodation, and the shipping of belongings have been treated as taxable to an employee. Employees relocating to the U.S. who are provided with such benefits by their employee will face a tax charge on these costs. Where the employer pays tax on an employee’s behalf and the tax “grossed up,” this could significantly increase the total costs of a relocation. Both the benefit cost as well as the tax cost should be factored into budgeting.

The benefits provided may also differ from a typical relocation; employees moving at shorter notice may not have made arrangements to return to the U.S. yet and so providing temporary housing, car leasing, and other interim benefits can further push up the tax cost to the employer.