# § 406. Employees of foreign affiliates covered by section 3121(l) agreements
**(a)** **Treatment as employees of American employer** For purposes of applying this part with respect to a pension, profit-sharing, or stock bonus plan described in section 401(a) or an annuity plan described in section 403(a), of an American employer (as defined in section 3121(h)), an individual who is a citizen or resident of the United States and who is an employee of a foreign affiliate (as defined in section 3121(*l*)(6)) of such American employer shall be treated as an employee of such American employer, if—
**(1)** such American employer has entered into an agreement under section 3121(*l*) which applies to the foreign affiliate of which such individual is an employee;
**(2)** the plan of such American employer expressly provides for contributions or benefits for individuals who are citizens or residents of the United States and who are employees of its foreign affiliates to which an agreement entered into by such American employer under section 3121(*l*) applies; and
**(3)** contributions under a funded plan of deferred compensation (whether or not a plan described in section 401(a) or 403(a)) are not provided by any other person with respect to the remuneration paid to such individual by the foreign affiliate.
**(b)** **Special rules for application of section 401(a)**
**(1)** **Nondiscrimination requirements** For purposes of applying section 401(a)(4) and section 410(b) with respect to an individual who is treated as an employee of an American employer under subsection (a)—
**(A)** if such individual is a highly compensated employee (within the meaning of section 414(q)), he shall be treated as having such capacity with respect to such American employer; and
**(B)** the determination of whether such individual is a highly compensated employee (as so defined) shall be made by treating such individual’s total compensation (determined with the application of paragraph (2) of this subsection) as compensation paid by such American employer and by determining such individual’s status with regard to such American employer.
**(2)** **Determination of compensation** For purposes of applying paragraph (5) of section 401(a) with respect to an individual who is treated as an employee of an American employer under subsection (a)—
**(A)** the total compensation of such individual shall be the remuneration paid to such individual by the foreign affiliate which would constitute his total compensation if his services had been performed for such American employer, and the basic or regular rate of compensation of such individual shall be determined under regulations prescribed by the Secretary; and
**(B)** such individual shall be treated as having paid the amount paid by such American employer which is equivalent to the tax imposed by section 3101.
**[(c)** **Repealed. Pub. L. 104–188, title I, § 1401(b)(7), Aug. 20, 1996, 110 Stat. 1789]**
**(d)** **Deductibility of contributions** For purposes of applying section 404 with respect to contributions made to or under a pension, profit-sharing, stock bonus, or annuity plan by an American employer, or by another taxpayer which is entitled to deduct its contributions under section 404(a)(3)(B), on behalf of an individual who is treated as an employee of such American employer under subsection (a)—
Any amount deductible by a foreign affiliate under this subsection shall be deductible for its taxable year with or within which the taxable year of such American employer ends.
**(1)** except as provided in paragraph (2), no deduction shall be allowed to such American employer or to any other taxpayer which is entitled to deduct its contributions under such sections,
**(2)** there shall be allowed as a deduction to the foreign affiliate of which such individual is an employee an amount equal to the amount which (but for paragraph (1)) would be deductible under section 404 by the American employer if he were an employee of the American employer, and
**(3)** any reference to compensation shall be considered to be a reference to the total compensation of such individual (determined with the application of subsection (b)(2)).
**(e)** **Treatment as employee under related provisions** An individual who is treated as an employee of an American employer under subsection (a) shall also be treated as an employee of such American employer, with respect to the plan described in subsection (a)(2), for purposes of applying the following provisions of this title:
**(1)** Section 72(f) (relating to special rules for computing employees’ contributions).
**(2)** Section 2039 (relating to annuities).
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**Source Credit**: (Added Pub. L. 88–272, title II, § 220(a), Feb. 26, 1964, 78 Stat. 58; amended Pub. L. 91–172, title V, § 515(c)(2), Dec. 30, 1969, 83 Stat. 645; Pub. L. 93–406, title II, §§ 1016(a)(4), 2005(c)(12), Sept. 2, 1974, 88 Stat. 929, 992; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98–21, title III, § 321(c), (e)(2)(A)–(D)(i), Apr. 20, 1983, 97 Stat. 119, 120; Pub. L. 98–369, div. A, title IV, § 491(d)(13)–(15), July 18, 1984, 98 Stat. 849; Pub. L. 99–514, title XI, §§ 1112(d)(3), 1114(b)(9)(A), (C), title XVIII, § 1852(e)(2)(C), Oct. 22, 1986, 100 Stat. 2445, 2451, 2868; Pub. L. 100–647, title I, § 1011A(b)(1)(C), (16), Nov. 10, 1988, 102 Stat. 3472, 3475; Pub. L. 101–239, title VII, §§ 7811(g)(3), 7831(f), title X, § 10201(b)(1), (2), Dec. 19, 1989, 103 Stat. 2409, 2427, 2472; Pub. L. 102–318, title V, § 521(b)(14), July 3, 1992, 106 Stat. 311; Pub. L. 104–188, title I, §§ 1401(b)(7), 1402(b)(2), Aug. 20, 1996, 110 Stat. 1789, 1790.)
## Editorial Notes
### Amendments
1996—Subsec. (c). , struck out subsec. (c) which related to treatment of termination of status as deemed employee.
Subsec. (e)(2), (3). , redesignated par. (3) as (2) and struck out former par. (2) which read as follows: “Section 101(b) (relating to employees’ death benefits).”
1992—Subsec. (c). substituted “402(d)” for “402(e)”.
1989—Subsec. (a). , substituted “3121()(6)” for “3121()(8)”.
Subsec. (b)(1)(A). , made technical correction to , see 1986 Amendment note below.
Subsec. (c). , substituted “purposes of limitation” for “purposes limitation” in heading.
Subsec. (c)(3). , substituted “3121()(6)(B)” for “3121()(8)(B)”.
1988—Subsec. (c). , struck out “of capital gain provisions and” after “service for purposes” in heading and substituted “applying section 402(e)” for “applying subsections (a)(2) and (e) of section 402, and section 403(a)(2)” in text.
Subsec. (e). , redesignated pars. (2) to (4) as (1) to (3), respectively, and struck out former par. (1) which read as follows: “Section 72(d) (relating to employees’ annuities).”
1986—Subsec. (b)(1). , struck out “(without regard to paragraph (1)(A) thereof)” after “section 410(b)” in introductory text.
Subsec. (b)(1)(A). , as amended by , substituted “a highly compensated employee (within the meaning of section 414(q))” for “an officer, shareholder, or person whose principal duties consist in supervising the work of other employees of a foreign affiliate of such American employer”.
Subsec. (b)(1)(B). , inserted “(as so defined)” after “employee”.
Subsec. (e)(5). , struck out par. (5) which read as follows: “Section 2517 (relating to certain annuities under qualified plans).”
1984—Subsec. (a). , substituted in introductory provision “or an annuity plan described in section 403(a)” for “, an annuity plan described in section 403(a), or a bond purchase plan described in section 405(a)”.
Subsec. (a)(3). , substituted “or 403(a)” for “, 403(a), or 405(a)”.
Subsec. (d). , (B), substituted in introductory provision “section 404” for “sections 404 and 405(c)”, and “or annuity” for “annuity, or bond purchase”.
Subsec. (d)(2). , struck out “(or section 405(c))” after “section 404”.
1983—, substituted “Employees of foreign affiliates covered by section 3121() agreements” for “Certain employees of foreign subsidiaries” in section catchline.
Subsec. (a). , amended subsec. (a) generally, substituting “American employer” for “domestic corporation” in heading and in text wherever appearing, inserting reference to , inserting “or resident” after “citizen” wherever appearing, substituting “foreign affiliate” for “foreign subsidiary” wherever appearing, and “foreign affiliates” for “foreign subsidiaries”.
Subsec. (b). , substituted reference to an American employer for reference to a domestic corporation, and reference to an affiliate for reference to a subsidiary, wherever appearing.
Subsec. (c). , substituted reference to an American employer for reference to a domestic corporation, and reference to an affiliate for reference to a subsidiary, wherever appearing in provisions preceding par. (1) and in pars. (1) and (2).
Subsec. (c)(3). , (B), substituted “foreign affiliate by reason of which he is treated as an employee of such American employer, if he becomes an employee of another entity in which such American employer has not less than a 10-percent interest (within the meaning of section 3121()(8)(B)” for “foreign subsidiary by reason of which he is treated as an employee of such domestic corporation, if he becomes an employee of another corporation controlled by such domestic corporation”.
Subsec. (d). , (C), substituted references to an American employer for references to a domestic corporation and reference to an affiliate for a reference to a subsidiary wherever appearing, substituted “another taxpayer” for “another corporation” in provisions preceding par. (1), and substituted “any other taxpayer” for “any other corporation” in par. (1).
Subsec. (e). , substituted reference to an American employer for reference to a domestic corporation wherever appearing in provisions preceding par. (1).
1976—Subsec. (b)(2)(A). struck out “or his delegate” after “Secretary”.
1974—Subsec. (b)(1). , substituted “section 401(a)(4) and section 410(b) (without regard to paragraph (1)(A) thereof)” for “paragraphs (3)(B) and (4) of section 401(a)”.
Subsec. (c). , substituted “subsections (a)(2) and (e) of section 402” for “section 72(n), section 402(a)(2)”.
1969—Subsec. (c). substituted “provisions and limitation of tax” for “provisions” in heading, and substituted “section 72(n), section 402(a)(2),” for “section 402(a)(2)” in text.
## Statutory Notes and Related Subsidiaries
### Effective Date of 1996 Amendment
Amendment by applicable to taxable years beginning after , with retention of certain transition rules, see , set out as a note under .
Amendment by applicable with respect to decedents dying after , see , set out as a note under .
### Effective Date of 1992 Amendment
Amendment by applicable to distributions after , see , set out as a note under .
### Effective Date of 1989 Amendment
Amendment by effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, , to which such amendment relates, see , set out as a note under .
Amendment by effective as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .
> “The amendments made by this section [amending this section,
>
> , and
>
> , The Public Health and Welfare] shall apply with respect to any agreement in effect under section 3121(
>
> ) of the Internal Revenue Code of 1986 on or after
>
> , with respect to which no notice of termination is in effect on such date.”
, , , provided that:
### Effective Date of 1988 Amendment
Amendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .
### Effective Date of 1986 Amendment
Amendment by applicable to plan years beginning after , with special rule regarding collective bargaining agreements ratified before , and with provision for waiver of excise tax on reversions, see , set out as a note under .
Amendment by section 1114(b)(9)(A), (C) of applicable to years beginning after , see , set out as a note under .
> “The amendments made by this paragraph [amending this section and
>
> and repealing
>
> ] shall apply to transfers after the date of the enactment of this Act [
>
> ].”
, , , provided that:
### Effective Date of 1984 Amendment
Amendment by applicable to obligations issued after , see , set out as a note under .
### Effective Date of 1983 Amendment
> **“(1)**
>
> **(A)** The amendments made by this section [amending this section and sections 407, 1402, 3121, and 6413 of this title and section 410 of Title 42, The Public Health and Welfare] (other than subsection (d) [amending section 407 of this title]) shall apply to agreements entered into after the date of the enactment of this Act [Apr. 20, 1983].
>
> **“(B)** At the election of any American employer, the amendments made by this section (other than subsection (d)) shall also apply to any agreement entered into on or before the date of the enactment of this Act. Any such election shall be made at such time and in such manner as the Secretary may by regulations prescribe.
>
> **“(2)**
>
> **(A)** The amendments made by subsection (d) [amending section 407 of this title] shall apply to plans established after the date of the enactment of this Act [Apr. 20, 1983].
>
> **“(B)** At the election of any domestic parent corporation the amendments made by subsection (d) shall also apply to any plan established on or before the date of the enactment of this Act. Any such election shall be made at such time and in such manner as the Secretary may by regulations prescribe.”
, , , provided that:
### Effective Date of 1974 Amendment
Amendment by applicable, except as otherwise provided in section 1017(c) through (i) of , for plan years beginning after , but, in the case of plans in existence on , amendment by applicable for plan years beginning after , see , set out as an Effective Date; Transition of Rules note under .
Amendment by applicable only with respect to distributions or payments made after , in taxable years beginning after , see , set out as a note under .
### Effective Date of 1969 Amendment
Amendment by applicable to taxable years ending after , see , set out as a note under .
### Effective Date
> “The amendments made by subsections (a) [enacting this section], (b) [enacting
>
> ], and (c)(1) [amending the analysis preceding
>
> ] shall apply to taxable years ending after
>
> . The amendments made by subsections (c)(2) [amending
>
> ] and (3) [amending
>
> , The Public Health and Welfare] shall apply to remuneration paid after
>
> .”
, , , provided that:
### Regulations
Secretary of the Treasury or his delegate to issue before , final regulations to carry out amendments made by sections 1112 and 1114 of , see , set out as a note under .
### Plan Amendments Not Required Until January 1, 1998
For provisions directing that if any amendments made by subtitle D [§§ 1401–1465] of title I of require an amendment to any plan or annuity contract, such amendment shall not be required to be made before the first day of the first plan year beginning on or after , see , set out as a note under .
### Plan Amendments Not Required Until January 1, 1994
For provisions directing that if any amendments made by subtitle B [§§ 521–523] of title V of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , set out as a note under .
### Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , as amended, set out as a note under .