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International Social Security Agreements

By Bruce D. Schobel, Corporate Vice President and Actuary, New York Life Insurance Company

With growing international business activity, many companies transfer employees between countries. These transfers involve many obvious problems that can be anticipated. In addition, however, employers and employees often encounter unexpected problems involving social security coverage and benefits. In some cases, they must pay social security taxes to two countries simultaneously for the same period of work, even though both countries may not ultimately pay benefits. In other cases, social security benefit protection may be fragmented or lost.

Problems involving "double" social security coverage are especially common when Americans are transferred outside the United States, because of the extraterritorial nature of U.S. tax laws. The costs can be quite high, particularly if the employer reimburses the employee for the additional contributions (often paying associated income taxes, as well). The circumstances can differ considerably from one country to another. The best available situation occurs in the relative handful of countries that have international social security agreements in effect with the U.S.

Coverage and benefit problems have been apparent since the first transfers of employees between countries with social security systems. If the number of international transfers is large enough to attract attention, then the countries involved usually have close ties to each other and political and economic motivations for solving these problems by international agreements, which resemble treaties.

International social security agreements have a history almost as old as social security itself. The first bilateral social security agreement, between France and Italy, was signed in 1919. Since then, the European countries have negotiated a number of bilateral and multinational agreements. Many other countries in other regions have similar arrangements in effect.

The U.S. signed its first true social security agreement in 1973, with Italy, but U.S. law did not permit the agreement to go into effect. Enabling legislation was enacted into law in 1977. Following is a list of the twenty agreements that the U.S. currently has in effect:

International Social Security Agreements Involving the U.S.
Country Signing Date Effective Date
Italy May 23, 1973 November 1, 1978
Germanya January 7, 1976 December 1, 1979
Switzerland July 18, 1979 November 1, 1980
Belgium February 19, 1982 July 1, 1984
Norway January 13, 1983 July 1, 1984
Canadab March 11, 1981 August 1, 1984
United Kingdom February 13, 1984 January 1, 1985c
Sweden May 27, 1985 January 1, 1987
Spain September 30, 1986 April 1, 1988
France March 2, 1987 July 1, 1988
Portugal March 30, 1988 August 1, 1989
Netherlands December 8, 1987 November 1, 1990
Austria July 13, 1990 November 1, 1991
Finland June 3, 1991 November 1, 1992
Ireland April 14, 1992 September 1, 1993
Luxembourg February 12, 1992 November 1, 1993
Greece June 22, 1993 September 1, 1994
South Korea March 13, 2000 April 1, 2001
Chile February 16, 2000 December 1, 2001
Australia September 27, 2001 October 1, 2002

a This agreement, originally with the former Federal Republic of Germany (or West Germany), was extended to the former East German territory, effective October 3, 1990.
b This agreement also applies to Quebec's provincial plan.
c The benefit provisions of this agreement went into effect on January 1, 1988.

The provisions of the Social Security Act that authorize the U.S. to enter into international social security agreements are very general. With respect to coverage, the law provides an exemption from paying social security taxes if, pursuant to an international agreement, the employment is subject to the social security laws of another country. The agreements ordinarily have parallel provisions regarding the other country's social security laws. Thus, the social security agreements can effectively prevent the problem of double coverage from occurring by specifying which country's coverage will govern in any particular set of circumstances.

With respect to benefits, the law allows periods of social security coverage in an agreement country to be added to periods of U.S. coverage (or "totalized"), when necessary for purposes of determining the eligibility for U.S. social security benefits. Parallel provisions in the agreements apply to Americans who work outside the U.S. in agreement countries. In this way, the eligibility problems associated with international transfers are usually solved.

U.S. law also solves the usual benefit-portability problems by permitting residents of agreement countries to be exempt from the provisions that restrict the payment of U.S. social security benefits outside the U.S. to persons who are not U.S. citizens. Citizens of agreement countries automatically meet some of the regular exceptions to these provisions, but the law also permits citizens of other countries who reside in agreement countries to be exempt from the restrictions. Most of the U.S. agreements provide such exemptions.

When an employee is transferred from one country to another, certain practical steps must be taken to implement the social security principles and procedures described above. These practical steps are more complicated when an international social security agreement is in effect. Three areas of interest are employment arrangements, certificates of coverage, and applications for benefits.

Although each country's laws may be very clear as to the social security coverage of employees of domestic employers, foreign affiliates of domestic employers, and foreign employers, determining the actual employment relationship may be difficult. For example, consider an employee who is transferred by a multinational company from its headquarters in the U.S. to the headquarters of a foreign affiliate in another country. Is that individual an employee of the U.S. company or of the foreign affiliate? What are the practical implications of different answers to that question?

In the absence of an international agreement, the U.S. social security program will mandatorily cover this employee if he or she is continuing to work for the U.S. company, even though the work is performed outside the U.S. The U.S. program will also mandatorily cover the employee if the American employer has in effect a 3121(l) agreement covering the foreign affiliate. The worker will not be covered by the U.S. program if the foreign company is not covered by a 3121(l) agreement and he or she is, in fact, working for the foreign company. The employee will ordinarily be covered by the host country's social security program in any case, absent an international agreement.

If the U.S. has an international social security agreement in effect with the other country, then the length of the worker's assignment to that country is the most important determining factor. If the assignment is permanent or of indefinite duration, then the territoriality principle ordinarily applies (except in Italy), and the worker is covered by the social security program of the country where the work is performed. If the assignment is temporary — generally, expected to last five years or less — then the individual may be exempt from coverage under that country's social security system, but only if he or she (in cooperation with the employer) can document that coverage is continuing under the U.S. social security system.

These same questions arise in the opposite direction if a worker from an agreement country is transferred to a private-sector job in the U.S. If no international agreement is in effect, then the employee is always covered under the U.S. social security program. The possibility of double coverage will depend on the nationality of the true employer and the extraterritoriality of the home country's social security law. With an international agreement in place, the length of the assignment to the other country is most important.

The administrative device used to document coverage under a country's social security system is the "certificate of coverage." An employee who is transferred to the U.S. and wants an exemption from U.S. social security coverage, pursuant to an international agreement, must obtain such a certificate from the responsible authorities in each country from which he or she is coming. Similarly, an employee who is transferred from the U.S. to another country and wants an exemption from coverage under that country's social security system, pursuant to an international agreement, must obtain a certificate of U.S. coverage from the U.S. Social Security Administration. An American working for a foreign affiliate of an American employer can obtain a certificate of U.S. coverage only if the foreign affiliate is included under a 3121(l) agreement; otherwise, coverage of this employee under the U.S. social security system is not possible.

To obtain a U.S. certificate of coverage, the information that typically must be included is:

  • Full name of worker (including maiden name for married women),
  • Date and place of birth,
  • Citizenship,
  • Country of worker's permanent residency,
  • U.S. social security number,
  • Country of hire,
  • Name and address of the employer in the U.S. and the other country, and
  • Date of transfer and anticipated date of return.

In addition, the employer must indicate whether the employee will remain employed by the American company while working in the other country or become an employee of a foreign affiliate. If the latter, then the employer must indicate whether the American parent company has a 3121(l) agreement in effect with respect to that affiliate and, if so, its effective date.

Other additional information might be required, depending on the terms of the particular agreement involved. For example, some countries require information about the worker's private health insurance coverage. Some countries require information about family members accompanying the transferred worker.

An individual who has worked in employment covered by the social security systems of two countries will need to apply for benefits from both of those countries. International social security agreements provide simplified application procedures in such cases. In general, a person may specify that an application for social security benefits filed with any agreement country should be considered a claim for benefits from the other country, as well. In that case, the country where the claim was filed will provide information from the application to the other country's responsible authorities and assist them in processing the claim. In particular, the countries may need to share information regarding periods of coverage in order to determine eligibility for pro rata benefits.

Because international social security agreements are so advantageous to employees, their families, and their employers, the number of these agreements can be expected to grow. In the 25 years since the enactment of legislation permitting the U.S. to enter into these agreements, 20 have been put into effect, all with major trading partners. Negotiations are underway with several other countries, including Mexico. However, until the U.S. has a broad network of social security relationships like exists in Europe, transfers of employees to or from the U.S. should be carefully evaluated with respect to their social security implications. These are important to the employees and to their employers, who often bear most of the costs.

This material is for information purposes only, Neither New York Life nor its agents provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.

Questions about this article or about New York Life, our subsidiaries and the products that we offer? Please call this toll free number 800-710-7945 to arrange for a discussion with a New York Life agent or a NYLIFE Securities LLC financial services professional.

Last Updated Date 9/26/2010

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