26 U.S.C. § 406 — Employees of foreign affiliates covered by section 3121(l) agreements

(a) Treatment as Employees of American Employer. For pension, profit-sharing, stock^* bonus, or annuity plans covered by section 401(a) or 403(a), a U.S. citizen or resident who works for the foreign affiliate of an American employer is treated as an employee^* of that American employer, if: (1) the American employer has a section 3121(l) agreement covering that foreign affiliate; (2) the employer's plan specifically covers U.S. citizens or residents working at foreign affiliates under a 3121(l) agreement; and (3) no one else is providing that individual with contributions to a separate funded deferred-compensation plan for the same pay from the foreign affiliate.

(b) Special Rules for Applying Section 401(a). (1) Nondiscrimination Requirements. When testing whether the plan discriminates in favor of highly paid employees (under sections 401(a)(4) and 410(b)) for someone treated as an American employer's employee under (a): (A) if that person counts as "highly compensated" under section 414(q), they're treated as highly compensated with respect to the American employer; and (B) whether they count as highly compensated is decided by treating all their pay (calculated under paragraph (2) below) as if the American employer paid it, and judging their status against the American employer.
(2) Determination of Compensation. For applying section 401(a)(5): (A) the person's total compensation is what the foreign affiliate paid them, as if they'd worked for the American employer instead — with the exact rate figured out under Treasury regulations; and (B) the person is treated as having paid the amount the American employer paid that equals the tax under section 3101 (Social Security tax).

[(c) Repealed.]

(d) Deductibility of Contributions. For deducting contributions to these plans under section 404, made by the American employer (or another taxpayer^* entitled to deduct under section 404(a)(3)(B)) on behalf of someone treated as an employee under (a): (1) except as (2) allows, no deduction goes to the American employer or that other taxpayer; (2) instead, the foreign affiliate that actually employs the person gets a deduction — equal to what the American employer could have deducted if the person had really been the American employer's employee; and (3) any reference to "compensation" in this calculation means that person's total compensation, as figured under (b)(2). A deduction the foreign affiliate takes under this subsection applies to whichever of its tax years overlaps with the end of the American employer's matching tax year.

(e) Treatment as Employee Under Related Provisions. Someone treated as an American employer's employee under (a) is also treated that way, for the plan described in (a)(2), when applying: (1) section 72(f) (special rules for figuring employee contributions); and (2) section 2039 (relating to annuities).