International (Foreign) Pensions – FAQ’s
Unfortunately official guidance on many specific treaty-pension issues is sparse – the best that can be done is to alert you to the potential
issues. “International Pensions” is intended to mean foreign retirement plans with a US connection
(participant is USC or tax resident)
In the author's experience, when it comes to international tax and legal matters the norm seems to be a failure to be informed of the
issues. The FAQ's set out below reflect some the troublesome issues that we see on a regular basis.
Do I have to file an FBAR (TD F 90-22.1) form for a foreign retirement plan?
Yes, you have to file an FBAR if the retirement scheme is a personal or individual account
You would not have to file if the plan was an employer administered plan or a traditional defined benefit
plan. The latest instructions to the FBAR form are silent on this point but the IRS has indicated in discussions with tax professionals that foreign personal pensions should be
What kinds of changes to my foreign retirement arrangement are not treaty protected and may result in income realization events?
At present the IRS has not offered any guidance on transfer of plan balances between nations.
Many nations allow transfers and that is the trend. For example, say a US citizen resident in the UK becomes resident in a third
country. Can he transfer the UK plan balance to that country's qualified retirement plan schemes?
Without a ruling from the IRS the transfer could be seen as a taxable
distribution. A transfer to a different type of plan within a country's qualified retirement plan system may be permitted but that specific treaty between the US and the relevant country must be consulted.
I am a US taxpayer and my foreign pension is held in a
trust. Do I have to file Form 3520 or 3520A?
The consequences of Form 3520 violations are severe given the penalties
involved. Unfortunately, there is little in the way of precise guidance
here. The instructions to Form 3520, Notice 97-34, and IRC Sec 679 refer to IRC Sec 402(b) plans (non-qualified deferred compensation trusts – most foreign employer pensions would fall under this
label). However, the trend has been away employer driven plans towards elective personal pensions wherein employee's make discretionary contributions to the
plan. The literal language of Sec. 402(b) does not cover these types of personal pensions and therefore it is questionable whether the exception to Form 3520 or 3520A reporting is
available. The reporting under these forms can be complicated and most taxpayers would like to avoid if
possible. On the other hand the penalties for failure to report can be
draconian. It is our conclusion that the exception from foreign trust reporting was intended to be broadly construed when it comes to foreign statutory retirement
plans. In all cases, the relevant tax treaty should be consulted first.
I understand that my UK pension under the US-UK Treaty is treated like a US qualified
plan. Does that mean that my UK pension is treated like a US qualified plan in every respect?
No, the best way to look at it is to look at the Treaty language which typically deals with three main elements of the pension: taxation/deduction of contributions; taxation of internal gains; and taxation of
distributions. When it comes to pensions there are many periphery issues that are simply not dealt
with. For example, US plans have their age limits to begin distributions and have required minimum distribution
requirements. UK retirement plans will have their own distribution rules that most be complied with rather than the US rules.
My foreign pension provides for a lump sum payment prior to my officially
retiring. This payment is tax-free. How will the IRS treat this payment.
In the past the IRS has set out very specific circumstances for a payment to be considered a pension
payment. Guidance was provided through revenue rulings on a treaty by treaty
basis. The modern trend however has been to accept a broad range of payments including lump sums if acceptable under the laws of the country where the pension is
located. You must check the specific treaty. The US-UK Treaty specifically provides for US acceptance of the tax-free nature of these payments.
I am a USC who is planning to move from the UK to another country that does not have the same treaty benefits as the US-UK
Treaty. I was told that under the new UK treaty my UK Personal Pension was qualified under US
rules. Where will my Personal Pension stand under US tax law when I no longer have access to the UK Treaty?
There is no clear answer. The previous contributions to the plan would be Treaty
protected. Under Sec. 402(b) highly compensated individuals may have some exposure to taxation of internal plan income but we feel that it is unlikely that the IRS would pursue this as it is somewhat illogical to conclude that a foreign plan corresponds to US plans when the US taxpayer is resident in the original Treaty protected jurisdiction, then when that individual relocates to a third country, the plan (internal income) becomes subject to US tax.
How will death benefits be taxed if I have US beneficiaries and non-US beneficiaries.
Most tax treaties reserve taxation of pension distributions to the country of residence of the
recipient. Death benefits are not specifically dealt with in income tax
treaties. If a US beneficiary, trustee, or executor receives a retirement plan death benefit it will be taxable as ordinary income as “income in respect of decedent.
My UK Personal Pension allows me to sock away a lot more than US IRA or 401K rules would allow – is that OK?
If the relevant Treaty grants corresponding approval to that pension the contribution would be allowed but any deduction on a US tax return would likely be limited to that permitted for US plans.
The material provided in this website is
for informational purposes only and does not constitute tax or
legal advice. Such advice can only be provided with full
knowledge of your particular facts and circumstances.