It's in episode Stereo Store (4x13), when they're shooting the porn movie at the Grotto, and Otto remarks that Gretchen's brief appearance will be the birth of the brilliant new star Gretchen Mannkusser.
Kenneth Mars (Otto) pronounces it as 'Mannkoosser', but of course it really should have been 'Mannküsser', with the sound of French 'tu' instead of 'tout', which means "man kisser" in German and could be taken as one of the series' subtle (or less than subtle) gay innuendos.
I also noticed the reference in this episode to Otto's favourite actor Rutger Hauer. I don't know if the implication is that he is German too, but of course he's Dutch!
I think one of the shortcomings of the English-speaking world is their near-total aversion to letter accents (diacritics). The worldwide prevalence of the 7-bit standard ASCII set in computing until the late 1980s, which didn't allow any accent marks, made matters even worse. In the case of composer Händel the English spelling 'Handel' at least sounded the same, but singers like Céline Dion and Björk are rarely given their correct names, and we seldom see German director Volker Schlöndorff or his Swedish colleagues Lasse Halström and Victor Sjöström with the right spelling (the latter even anglicized to Seastrom!). And it's not just in the spelling, but it also affects the pronunciation. It's not 'Byohrk' for heaven's sake, but 'Byerk'!
And you are absolutely right with regard to the name - it certainly alludes to "Manküsser" and is not a coincidence.
And as for the umlauts/diacritics/special characters...
The situation is of course hopeless in the english speaking world, but even in central europe people routinely ignore eg scandinavian specal characters ("Smørrebrød" is hardly ever spelled correctly) - but I guess that's sort of normal.
It's better to pretend that letters you don't see every day don't exists - you would not know how to pronounce them anyway....