us citizen working for foreign subsidiary

[k man]

Can a us citizen working for a foreign subsidiary owned by a us corp participate in the parent's 401(k)? what determines whether or not he can participate? is it whether or not he has US source income?

[Guest Emiliano]

Individuals working in a foreign subsidiary are not legally entitled to participate in plans in the US unless certain steps are taken. IRC section 406 allows such employees to be deemed employees of the US parent, but the companies must elect, under section 2121(l) to provide US soc sec coverage for all US citizens and resident alien employees of the foreign sub. See IRS Form 2032.

If the subsidiary is part of a controlled group with the parent, then IRC section 414 would apply.

[k man]

does the employee have to be paid in US source income in addition to the election? also, i cannot locate section 2121. is that a code cite?

[IRC401]

I am under the impression that section 406 applies only if the foreign sub and the US corp are not the same employer under IRC414. If the US parent (which owns 100% of the expat's employer) writes its plan so that the US citizen overseas is eligible to participate, what's the problem?

PS: The foreign country may tax the 401(k) contributions, in which case the individual would owe foreign tax when the money goes in and US tax when it comes out. Putting expatirates in a 401(k) plan is not for the faint of heart, and the employer should have botyh ERISA and expat tax adivisors working together.