U.S. Citizens Subject to Section 409A—Even When Working Abroad

Multinational companies that employ U.S. citizens and/or resident aliens may face particular challenges in complying with the Section 409A rules. The United States employs a worldwide tax system under which U.S. citizens and U.S. resident individuals are generally taxed on all income, whether derived in the United States or abroad.

Compensation earned by a U.S. expatriate or resident alien is subject to U.S. tax laws regardless of the jurisdiction in which the compensation is earned. Therefore, the deferral of such compensation will be subject to Section 409A.

Fortunately, the Section 409A final regulations contain numerous exceptions that permit both U.S. citizens and resident aliens working abroad and non-resident alien individuals working within the United States, to accrue benefits under non-complying foreign plans without becoming subject to the Section 409A sanctions.

However, where no exception applies, it will be necessary to amend the foreign arrangement to comply with Section 409A requirements in order to avoid sanctions.

Multinational employers should make an inventory of the compensation arrangements ex­tended to their global workforces, specifically, those arrangements that may have the effect of deferring compensation subject to U.S. taxes. This will involve looking at individual arrangements, group plans, written plans, unwritten arrangements—and both funded and unfunded arrangements.

Employers need to determine whether the compensation arrangements they have with their employees will be adversely affected by Section 409A—and whether exemptions are available.

For a complete discussion of the application of Section 409A to foreign and non-U.S. compensation arrangements and the exceptions that are available, please see the article The International Implications of §409A and Its Impact on Multinational Companies.