United States

U.S. Social Security for International Assignees: Impact of Social Security Totalization Agreements (video)

In this new video from KPMG LLP’s Global Mobility Services (GMS) practice, John Seery and Bob Rothery – both with GMS in the Washington National Tax practice – discuss the effect an international assignment may have on an assignee's Social Security contributions and benefits as well as the effect totalization agreements have on both the assignee and the employer’s international assignment-related costs.


John Seery: My name is John Seery with KPMG's Washington National Tax Office, and joining me today is Bob Rothery, another member of KPMG's Washington National Tax Office and the U.S. Representative to the firm's International Social Security Network.

Bob, international Social Security is a complicated issue, so I appreciate you being here and sharing your insights. Generally speaking, when international assignment program managers and coordinators, and even service providers, talk about totalization agreements, the focus tends to be on the tax consequences of sending an individual on an international assignment. Program managers are really more concerned about whether or not an individual is going to be covered by a totalization agreement, and to which country, the home or host location, and at what rate should they be paying Social Security tax? And, if the assignee is on an equalized policy, how much hypothetical tax should they be withholding?

I think what's often overlooked in this conversation is what the impact an international assignment may have on an assignee's Social Security benefits. Assignees are really more concerned about what happens if and when they drop out of their home country's Social Security program.

Bob Rothery: That's so true, and Social Security totalization agreements really have a big impact on this issue. Now, the thing to understand is that without a totalization agreement, a person might be subject to two Social Security taxes at once. When a person goes from the U.S. to a foreign country, if they're going for a U.S. employer, they're still subject to FICA.

But just by virtue of being present in the other country, they might be subject to that country's tax, as well. There's no foreign tax credit mechanism for Social Security taxes. So if you're subject to both, it's just an incremental cost. You're going to pay both. So what totalization agreements say is that you'll always only pay one or the other, and they determine which one you'll pay.

The default rule is that a worker will pay the tax of the country that she's present in. But then there's a special rule, the detached worker rule, that says that if a worker is sent by her home country employer for no more than five years, then he/she can stay on the home country tax.

In practical terms, that means that if a person is being sent on a foreign assignment by their home country, by a U.S. employer, they won't drop out of FICA, and thus, there won't be any impact on their eventual benefits. On the other hand, if they don't qualify as that detached worker under that detached worker exception, they may drop out of FICA, and then that could have an impact on their benefits.

John Seery: When you say dropping out of FICA, you really mean dropping out of two taxes, right -- Medicare or old age survivor disability insurance, or OASDI?

Bob Rothery:  Yeah, that's true. And that creates a lot of confusion. You'll always be subject to either both taxes or neither. You're never in a position where you pay one but not the other. So under a totalization agreement, if you're subject to FICA, you pay both. If you're subject to the home -- to the host country taxes, then you'll only pay those host country taxes.

John Seery:  What is Medicare?

Bob Rothery:  Well, that's a great question. A lot of people don't realize that America does have a national insurance program, and it applies mostly to retired workers. When a person reaches age 65, if he has been a U.S. citizen or resident for at least five years, he'll be eligible for Medicare.

The participation portion just determines how much the person will pay for their Medicare benefits. Part A Medicare, which is hospital insurance, is free if you've contributed to FICA for at least ten years. If you haven't, then you'll pay an insurance premium. If a person goes on assignment and drops out of FICA for a few years, likely they'll still have their ten years of participation, so Medicare Part A will still be free for them.

John Seery:  What about OASDI?

Bob Rothery:  Well, now, that is a bigger concern. When a person retires, when they reach full retirement age, they qualify for a Social Security pension if they've participated in the system for at least ten years, or formally 40 quarters. But their benefit is -- depends on their top 35 years of earnings. Its taken as an average of their inflation-adjusted top 35 years.  If they've left the system for a few years, they might not have their full 35 years of participation; so it could have a negative impact on the amount of their eventual benefit.

John Seery:  If I'm an assignee, I might be hesitant to take an international assignment if it could mean my Social Security benefits are negatively impacted. What effect does a totalization agreement have on this issue?

Bob Rothery:  Well, that's a great question, and that is really what is important for an assignee to understand. If a person works in a totalization country for a few years, they may qualify for a partial benefit from that other country. When determining whether they have enough years of participation, they'll take into account both the number of years that they've worked in the other country as well as in the U.S. And if the two together equal the minimum participation, then the person will get a partial benefit.

John Seery:  My understanding is that actually works in the reverse scenario, as well, where a foreign national comes into the U.S., they may actually qualify to receive a partial benefit from the U.S. Social Security program, assuming that they have at least six quarters of participating in FICA and have a total of 40 quarters combined between the U.S. and the totalization country.

Bob Rothery:  Right.

John Seery:  Speaking of partial benefits, if an individual actually qualifies to collect some sort of total lives benefit, they actually apply for that benefit through their home country's Social Security authority, and that's because the home country needs to certify to the host country that an individual actually qualifies to receive their home country Social Security benefits.

Bob Rothery:  Exactly. In fact, that's a big source of comfort for a person who's going on assignment, and it's a real concern if you tell them about how all this works, and they say, "Well, how am I going to get a benefit from Switzerland 20 years from now?" Well, they don't have to worry about that. The U.S. Social Security Administration will take care of that for them.

John Seery:  I think a takeaway from our conversation is that although the benefit provisions of totalization agreements don't necessarily impact the assignment cost or tax cost of sending an individual on an international assignment, it does have a real impact on international assignment programs, because it helps to alleviate some concerns that individuals might have about going on a foreign assignment.

Bob Rothery:  Right, and that makes it a little bit easier to induce people to go on an assignment.

John Seery:  Well, great, Bob. Thanks for joining me today. A fascinating conversation. And thank you for watching.


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