Title 26 — Internal Revenue CodeRelease 119-73
§406 Employees of foreign affiliates covered by section 3121(l) agreements
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter D— - Deferred Compensation, Etc. › Part PART I— - PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC. › Subpart Subpart A— - General Rule › § 406
Summary
Counts U.S. citizens or residents who work for a foreign affiliate as if they were employees of the American employer for certain retirement plans (401(a) pension, profit‑sharing, or stock bonus plans and 403(a) annuity plans) when three things are true: the American employer has an agreement under section 3121(l) that covers that foreign affiliate; the employer’s plan specifically provides contributions or benefits for U.S. citizens or residents who work for those covered foreign affiliates; and no one else provides funded deferred‑compensation contributions for the pay the foreign affiliate pays that person. For rules about fair testing and coverage (sections 401(a)(4) and 410(b)), those workers keep any “highly compensated” status under section 414(q), and their total pay is treated as the pay the foreign affiliate actually paid but counted as if paid by the American employer; the basic pay rate is set by Treasury rules. For testing under paragraph (5) of section 401(a), they are treated as having paid the amount equal to the tax in section 3101. For deductions under section 404, the American employer generally gets no deduction for those contributions, but the foreign affiliate may deduct the amount that would have been deductible for the American employer. They are also treated as employees for section 72(f) (employee contribution rules) and section 2039 (annuities).
Full Legal Text
Title 26, §406
Internal Revenue Code — Source: USLM XML via OLRC
(a)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)(1)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)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)
(d)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)—
(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)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).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
1996—Subsec. (c). Pub. L. 104–188, § 1401(b)(7), struck out subsec. (c) which related to treatment of termination of status as deemed employee. Subsec. (e)(2), (3). Pub. L. 104–188, § 1402(b)(2), 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). Pub. L. 102–318 substituted “402(d)” for “402(e)”. 1989—Subsec. (a). Pub. L. 101–239, § 10201(b)(1), substituted “3121(l)(6)” for “3121(l)(8)”. Subsec. (b)(1)(A). Pub. L. 101–239, § 7831(f), made technical correction to Pub. L. 99–514, § 1114(b)(9)(A), see 1986 Amendment note below. Subsec. (c). Pub. L. 101–239, § 7811(g)(3), substituted “purposes of limitation” for “purposes limitation” in heading. Subsec. (c)(3). Pub. L. 101–239, § 10201(b)(2), substituted “3121(l)(6)(B)” for “3121(l)(8)(B)”. 1988—Subsec. (c). Pub. L. 100–647, § 1011A(b)(16), 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). Pub. L. 100–647, § 1011A(b)(1)(C), 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). Pub. L. 99–514, § 1112(d)(3), struck out “(without regard to paragraph (1)(A) thereof)” after “section 410(b)” in introductory text. Subsec. (b)(1)(A). Pub. L. 99–514, § 1114(b)(9)(A), as amended by Pub. L. 101–239, § 7831(f), 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). Pub. L. 99–514, § 1114(b)(9)(C), inserted “(as so defined)” after “employee”. Subsec. (e)(5). Pub. L. 99–514, § 1852(e)(2)(C), struck out par. (5) which read as follows: “section 2517 (relating to certain annuities under qualified plans).” 1984—Subsec. (a). Pub. L. 98–369, § 491(d)(13), 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). Pub. L. 98–369, § 491(d)(14), substituted “or 403(a)” for “, 403(a), or 405(a)”. Subsec. (d). Pub. L. 98–369, § 491(d)(15)(A), (B), substituted in introductory provision “section 404” for “section 404 and 405(c)”, and “or annuity” for “annuity, or bond purchase”. Subsec. (d)(2). Pub. L. 98–369, § 491(d)(15)(C), struck out “(or section 405(c))” after “section 404”. 1983—Pub. L. 98–21, § 321(e)(2)(D)(i), substituted “Employees of foreign affiliates covered by section 3121(l) agreements” for “Certain employees of foreign subsidiaries” in section catchline. Subsec. (a). Pub. L. 98–21, § 321(c), amended subsec. (a) generally, substituting “American employer” for “domestic corporation” in heading and in text wherever appearing, inserting reference to section 3121(h) of this title, inserting “or resident” after “citizen” wherever appearing, substituting “foreign affiliate” for “foreign subsidiary” wherever appearing, and “foreign affiliates” for “foreign subsidiaries”. Subsec. (b). Pub. L. 98–21, § 321(e)(2)(A), 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). Pub. L. 98–21, § 321(e)(2)(A), 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). Pub. L. 98–21, § 321(e)(2)(A), (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(l)(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). Pub. L. 98–21, § 321(e)(2)(A), (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). Pub. L. 98–21, § 321(e)(2)(A), substituted reference to an American employer for reference to a domestic corporation wherever appearing in provisions preceding par. (1). 1976—Subsec. (b)(2)(A). Pub. L. 94–455 struck out “or his delegate” after “Secretary”. 1974—Subsec. (b)(1). Pub. L. 93–406, § 1016(a)(4), 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). Pub. L. 93–406, § 2005(c)(12), substituted “subsections (a)(2) and (e) of section 402” for “section 72(n), section 402(a)(2)”. 1969—Subsec. (c). Pub. L. 91–172 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 AmendmentAmendment by section 1401(b)(7) of Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1999, with retention of certain transition rules, see section 1401(c) of Pub. L. 104–188, set out as a note under section 402 of this title. Amendment by section 1402(b)(2) of Pub. L. 104–188 applicable with respect to decedents dying after Aug. 20, 1996, see section 1402(c) of Pub. L. 104–188, set out as a note under section 101 of this title.
Effective Date
of 1992 AmendmentAmendment by Pub. L. 102–318 applicable to distributions after Dec. 31, 1992, see section 521(e) of Pub. L. 102–318, set out as a note under section 402 of this title.
Effective Date
of 1989 AmendmentAmendment by section 7811(g)(3) of Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. Amendment by section 7831(f) of Pub. L. 101–239 effective as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 7831(g) of Pub. L. 101–239, set out as a note under section 1 of this title. Pub. L. 101–239, title X, § 10201(c), Dec. 19, 1989, 103 Stat. 2472, provided that: “The
Amendments
made by this section [amending this section, section 3121 of this title, and section 410 of Title 42, The Public Health and Welfare] shall apply with respect to any agreement in effect under section 3121(l) of the Internal Revenue Code of 1986 on or after June 15, 1989, with respect to which no notice of termination is in effect on such date.”
Effective Date
of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date
of 1986 AmendmentAmendment by section 1112(d)(3) of Pub. L. 99–514 applicable to plan years beginning after Dec. 31, 1988, with special rule regarding collective bargaining agreements ratified before Mar. 1, 1986, and with provision for waiver of excise tax on reversions, see section 1112(e) of Pub. L. 99–514, set out as a note under section 401 of this title. Amendment by section 1114(b)(9)(A), (C) of Pub. L. 99–514 applicable to years beginning after Dec. 31, 1988, see section 1114(c)(3) of Pub. L. 99–514, set out as a note under section 414 of this title. Pub. L. 99–514, title XVIII, § 1852(e)(2)(E), Oct. 22, 1986, 100 Stat. 2868, provided that: “The
Amendments
made by this paragraph [amending this section and section 407 of this title and repealing section 2517 of this title] shall apply to transfers after the date of the enactment of this Act [Oct. 22, 1986].”
Effective Date
of 1984 AmendmentAmendment by Pub. L. 98–369 applicable to obligations issued after Dec. 31, 1983, see section 491(f)(1) of Pub. L. 98–369, set out as a note under section 62 of this title.
Effective Date
of 1983 Amendment Pub. L. 98–21, title III, § 321(f), Apr. 20, 1983, 97 Stat. 120, provided that: “(1)(A) The
Amendments
made by this section [amending this section and section 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.”
Effective Date
of 1974 AmendmentAmendment by section 1016(a)(4) of Pub. L. 93–406 applicable, except as otherwise provided in section 1017(c) through (i) of Pub. L. 93–406, for plan years beginning after Sept. 2, 1974, but, in the case of plans in existence on Jan. 1, 1974, amendment by Pub. L. 93–406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93–406, set out as an
Effective Date
Transition of Rules note under section 410 of this title. Amendment by section 2005(c)(12) of Pub. L. 93–406 applicable only with respect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93–406, set out as a note under section 402 of this title.
Effective Date
of 1969 AmendmentAmendment by Pub. L. 91–172 applicable to taxable years ending after Dec. 31, 1969, see section 515(d) of Pub. L. 91–172, set out as a note under section 402 of this title.
Effective Date
Pub. L. 88–272, title II, § 220(d), Feb. 26, 1964, 78 Stat. 63, provided that: “The
Amendments
made by subsections (a) [enacting this section], (b) [enacting section 407 of this title], and (c)(1) [amending the analysis preceding section 401 of this title] shall apply to taxable years ending after December 31, 1963. The
Amendments
made by subsections (c)(2) [amending section 3121 of this title] and (3) [amending section 409 of Title 42, The Public Health and Welfare] shall apply to remuneration paid after December 31, 1962.”
Regulations
Secretary of the Treasury or his delegate to issue before Feb. 1, 1988, final
Regulations
to carry out
Amendments
made by section 1112 and 1114 of Pub. L. 99–514, see section 1141 of Pub. L. 99–514, set out as a note under section 401 of this title. Plan
Amendments
Not Required Until January 1, 1998For provisions directing that if any
Amendments
made by subtitle D [§§ 1401–1465] of title I of Pub. L. 104–188 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 Jan. 1, 1998, see section 1465 of Pub. L. 104–188, set out as a note under section 401 of this title. Plan
Amendments
Not Required Until January 1, 1994For provisions directing that if any
Amendments
made by subtitle B [§§ 521–523] of title V of Pub. L. 102–318 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 Jan. 1, 1994, see section 523 of Pub. L. 102–318, set out as a note under section 401 of this title. Plan
Amendments
Not Required Until January 1, 1989For 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 Pub. L. 99–514 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 Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 406
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73