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Foreign Pensions, Transactions with Foreign Person, Trust or Estate Not Reported May Cost You $10,000
Note: BY DEFINITION A U.S. PERSON (AS USED HEREIN) IS ANY PERSON OR ENTITY THAT IS REQUIRED TO FILE AS A U.S. RESIDENT TAXPAYER. THEREFORE THIS INCLUDES A FOREIGN NATIONAL WORKING TEMPORARILY IN THE U.S. BUT FOR MORE THAN 183 DAYS, THE SPOUSE OF A U.S. CITIZEN WHO ELECTED TO FILE A JOINT U.S. TAX RETURN, A U.S. SUBSIDIARY
· Private plans (similar to U.S. IRA, Simple, etc.
o Details must be reported on FBARs and FATCA reports. No disagreement anywhere. These are all private account which the US person has direct control.
· Employment plans, including both defined benefit (similar to most of the older U.S. plans where the employer and employee contributed to the plan and there was a stated benefit based on a formula driven by years of service and salary) and defined contribution plans (like a 401(k) plan where the benefits are based on the investment performance of the plan.
o If the employer is a government agency or the plan is a government plan (similar to U.S. social security) there is no question that it need NOT be reported
o In some places the IRS states that in cases where the employee has no control over the plan, has no signing authority, and there exists a substantial risk of forfeiture (IE not vested) etc. then it is not a reportable asset; In other places it is less specific. The regulations have been changing constantly. Our new position that we are taking is based on the latest IRS information in order to be safe:
§ If a defined contribution plan and the employee has control of how the assets are invested (IE multiple individual plans are maintained by the employer DC pension plan , but the plan is not fully vested and there is a substantial risk of forfeiture, we are advising that it need not be reported on the FBAR.
§ If a defined contribution plan and the employee has control of how the assets are invested, and the plan is fully vested and there is a NO substantial risk of forfeiture, we are advising that it need should be be reported on the FBAR as our position is that the employee is not at risk of forfeiture, has control over the accounts maintained in his or her name and is entitled to a full distribution should they leave employment or otherwise be guaranteed benefits in the future.
§ If the employer plan is a defined benefit plan and the employee has no control over how the money is invested or any other control, and there exists a substantial risk of forfeiture, we are advising not to report the pension on the FBAR. There are differing opinions of these DB plans and many advisors are stating that they need not be reported however given the lack of risk of forfeiture thereby guaranteeing that the employee is guaranteed benefits in the future our position is to file a safe protective disclosure FBAR. The final regulations ore silent as regards this point.
§ If the employer plan is a defined benefit plan and the employee has no control over how the money is invested or any other control, but the employee is fully vested and there exists no substantial risk of forfeiture, we are advising to report the pension on the FBAR using the best actuarial values available, including estimating its value by calculating the present value of the annuity using the most recently provided information as has control over the accounts maintained in his or her name and is entitled to a full distribution should they leave employment or otherwise be guaranteed benefits in the future. So if a person is fully vested in year 5 and the plan states that they would receive $500 each month beginning at age 65 the estimated actuarial value of the plan can be determined. This should be done each year. There are differing opinions of these DB plans and many advisors are stating that they need not be reported however given the lack of risk of forfeiture thereby guaranteeing that the employee is guaranteed benefits in the future our position is to file a safe protective disclosure FBAR. The final regulations ore silent as regards this point.
§ Sometimes a plan is “frozen” such as if an employment terminates or say a foreign national is transferred to a subsidiary of their employer in another country. The plan actuary can provide a letter stating this and how much the annuity is worth at the year end.
Again because the IRS has now taken contradictory positions on this issue and has not yet issued final specific authoritative advice, we are left to advise our clients to file a protective report, including the best information available. Eventually THE Treasury Department/ IRS will issue specific guidance, but until that time, we are now advising everyone to remain safe.
INCOME TAX REPORTING-PENSIONS
§ There are two issues to keep in mind. One is how much income may be reported under each scenario and the other is whether or not mandatory contributions to a government retirement plan are deemed to be a creditable foreign tax.
· FOREIGN TAX CREDIT
o All additional income attributable to a foreign retirement plan that is required to be included in a U.S. filer’s income tax return is deemed to be foreign source income and any resulting U.S. tax can be offset by a foreign tax credit to the extent that taxes are available.
o If (and only if) there does not exist a Tax Totaliztion Plan between the U.S. and the other country, any mandatory contributions to a government pension plan, that are based as a percentage of income, are deemed to be a foreign income tax for the above purposes. HOWEVER, if there is a TT plan in effect, said mandatory contributions cannot be used as a FTC.
· FOREIGN PENSIONS and Retirement Savings Plans
o Employee contributions to a government plan are not deductible or excluded from income that is taxed by the U.S.
o As foreign employer pension plans are not in absolute compliance with the US tax laws that apply to U.S. plans, the US tax rules that apply to US employer plans do not apply to those of foreign employer pension and retirement plans
§ Exceptions to these rules are if there is a contradictory provision in the income tax treaty with the U.S. To date there are only provisions of this nature in the US/UK and US/Belgium income tax treaties. There are also special elective provisions that can be made based on treaty based provisions between the US and Canada.
§ Employer contributions to employment retirement plans (both defined benefit and defined contribution) , where a substantial risk of forfeiture does NOT exist, are included in U.S. taxable income.
o As foreign private pension plans are not in absolute compliance with the US tax laws that apply to U.S. plans, the US tax rules that apply to US employer plans do not apply to those of foreign retirement savings plans
§ Employee contributions to these foreign plans are not tax deductible.
§ Any annual unrealized income within the plan, even though not distributed, is deemed as US taxable income to the US plan owner.
o At such time as the retirement pension benefits are received, a calculation needs to be made to determine what portion of the foreign pension benefits received are deemed as previously taxed income, excludible from U.S. income at the time received.
OTHER U.S. TAX REPORTING PROVISIONS
· PRIVATE RETIREMENT SAVINGS PLANS MAY BE A “GRANTOR TRUST”
o Forms 3520 and 3520A: Pursuant to the recently enacted U.S. HIRE ACT, reporting requirements associated with transactions with a foreign trust have changed. Among these include that any transaction between a foreign trust and a U.S. person needs to be reported on Form 3520 and the trust itself may be required to file Form 3520A. As many foreign retirement savings plans are deemed to be custodial “Grantor Trusts” this means that the plan (or its owner) may be required to file Form 3520A and contributions to the plan may be required to be reported by the person making the contribution on Form 3520. Looking forward, this would also require reporting of plan benefits received in the future on Form 3520A.
§ As a point of information (and not considered as advice) most U.S. persons are not aware of this requirement, nor have I read any guidance by the IRS, and as a result many U.S. persons are not filing either of the forms for foreign pension savings accounts that are considered to be grantor trusts. I am advising all my clients to comply with this provision if it applies, and should the IRS wake up and exclude it in the future there is no harm done. However should the IRS see this as a way to raise revenues in the future (the ANNUAL penalty for non compliance is $10,000) we are ahead of the game. If you have a private foreign pension plan I suggest that you speak to the plan administrator to determine if it is deemed a grantor trust (IE a custodian who manages financial assets for the beneficiary in a trust and the trust was created and owned by the U.S. person contributing to the plan).
§ Form 3520 is now required to be filed by any U.S. person who has any financial transaction with a foreign trust. This can get tricky as in the case of a foreign trust that owns a villa which is used by a U.S. person who does not pay the fair rental value to the trust that owns the property. Such would be deemed a transaction with a foreign trust that needs to be reported on Form 3520.
· Also required to be reported on Form 3520 would be any gifts or inheritances from a foreign person to a U.S. person of a value of at least $100,000.
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