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  1. As a general rule, and with exceptions and exemptions noted hereinafter, workers are covered under the social security program of the country where the work is performed (the “host country”). This is sometimes referred to as social security’s “territoriality rule.”
  2. This presents a problem for US Persons, because US Social Security covers US Persons working outside of the United States as employees of US companies and under the social security program of the host country, leading to dual coverage on the very same pay.
  3. The US person is covered if working for a US company, or a branch of the US company, anywhere in the world (so care should be taken not to unintentionally create an unwanted “corporate presence” in the host country).
  4. Employees of foreign affiliates and subsidiaries of a US company are treated similarly, if the US company files under Code section 3121(l).
    • Code section 3121(l) treatment is invoked when the US employer files an IRS Form 2032, which, among other things, requires the US company to pay the FICA taxes of both the US company and the US Person for work in the host country(ies) named in the Form 2032.
  5. None of this solves the (presumably undesirable) problem of dual coverage (and related dual taxation).
  6. Exemptions from the dual coverage problem, granted under US law, include some public employees, some nonprofits, employees of foreign governments.
  7. Exceptions from the dual coverage include US Persons working in any of the 25* countries with which the United States has bilateral International Social Security Agreements, also called TOTALIZATION AGREEMENTS (*Hungary may become the 26th).
    • Applies to a US Person who remains employed by the same US company when host country is a “totalization country”.
      • Also applies to US Persons employed by foreign affiliates/subsidiaries if a Code section 3121(l) election has been made.
    • Provides that Social Security tax is paid only to the host country (that is, where the work is performed), except that: for up to the first 5 years, the US Person is generally not covered by the host country Social program.
      • During this 5-year period, US Social Security continues, as though the US Person had remained in the United States (so the US company and the US Person pay their respective shares of the FICA tax under US Social Security).
      • This is the “detached worker rule” (an exception to the “territoriality rule”).
      • The detached worker rule is usually mandatory in totalization countries – not subject to employer or employee choice.
      • For the detached worker rule to apply, the US Person must continue working with the same US company.
      • After these 5 years the US Person is covered by the host country social benefits, not under US Social Security.
    • Totalization provides that service may be combined if necessary to satisfy eligibility for benefits in both countries,
      • but not combined if US Person has enough US service to qualify for US Social Security,
      • and not combined unless US Person has at least 6 quarters of US coverage.
      • If service is combined, benefits for each of the 2 systems are pro-rated, based on service.
      • The benefit under US Social Security is a pro-rata part of a theoretical (projected) benefit.
      • Totalization generally allows the benefit to be paid wherever the employee receives it.
      • The US Social Security Administration has on line a calculator to determine the US portion of the benefit.
    • Totalization agreement might not apply to all of a country’s social benefits (e.g., not to UK National Health).
    • A US Person employed by a foreign subsidiary or foreign affiliate of the US company may also be covered under the totalization agreement if a Code section 3121(l) election has been made by the US company.
    • The election is made by the US company’s filing of an IRS Form 2032.
      • The election applies to the US company’s foreign affiliates and foreign subsidiaries that are named in the filing.
      • It’s not necessary to name all affiliates or subsidiaries of the US company, nor is it necessary to name all countries where the US company has affiliates and subsidiaries.
      • The US company must own the subsidiary, or at least 10% of the affiliate (in stock if a corporation, otherwise in profits)
        • NOTE: A foreign parent cannot be a “foreign affiliate”, because the US company has to own at least 10%.
      • The election is applicable to all US Persons (current and future) employed by the named affiliate or subsidiary.
        • Even if the US Person is hired abroad.
        • Applicable US Persons cannot opt out of US Social Security if a 3121(l) election has been made.
        • To be covered, US Persons must be employed by the named affiliate or subsidiary, and not by the US company.
          • otherwise an unintended “corporate presence” might be established in the host country.
        • The US company must pay all FICA tax, both employee and employer, unless under the detached worker rule.
          • Note that some countries may consider the payment of employee FICA to be additional (taxable) income.
            • This could be quite costly, especially if the US company has an “equalization policy”.
        • A 3121(l) election exposes the US Person to dual social security coverage, except in a totalization country.
        • The 3121(l) election is irrevocable, except by the IRS for noncompliance (and once revoked, it’s not renewable).
        • A 3121(l) election may also affect qualified retirement benefits of the US company (if the US plan so provides).
    • Generally, a US Person employed by a US company in a totalization country stays under US Social Security for up to 5 years (as a detached worker), and then goes into the host country program. Totalization has no effect on a worker who is not a US person.
    • But a US Person employed by a foreign subsidiary/affiliate prior to a 3121(l) election doesn’t get the detached worker rule.
      • That US Person goes directly into the host country social security.
    • Prior to totalization, the US person was treated like a US Person employed by a US company.
    • When the country becomes a totalization country the US Person does not fall under the detached worker rule.

To be exempted from a social security system, virtually all countries require that the employee have a CERTIFICATE OF COVERAGE.

  • This is obtained by the employer from the country that continues to cover the employee, and presented to the employer that would otherwise cover the employee.


On Feb. 10, 2014, the U.S. Treasury Department released final regulations implementing the employer shared responsibility provisions of the ACA.  Included in these regulations were additional relief for mid-size employers as well as clarification of the rules for large employers.  The final rules will delay implementation for medium-sized employers that are covered by the employer mandate. Applicable large employers that have fewer than 100 full-time employees will have an additional year, until 2016, to comply with the pay or play rules. 

Thus, the employer shared responsibility provisions will generally apply to:

  • Employers with 100 or more full-time employees starting in 2015; and
  • Employers with 50-99 full-time employees starting in 2016.

To qualify for this delay, the employer must provide an appropriate certification as described in the final rules. 

Further, under the proposed rules, applicable large employers would need to offer coverage to at least 95 percent of their full-time employees to avoid the most significant penalties. The final rule provides transition relief that will phase in this requirement over two years, beginning in 2015.

To avoid a payment for failing to offer health coverage in 2015, applicable large employers will need to offer coverage to 70 percent of their full-time employees.

In 2016 and beyond, applicable large employers will need to offer coverage to 95 percent of their full-time employees to avoid these penalties.

Click here for a link to the whole article.