US taxpayers often participate in foreign pension plans as these can be useful, tax preferred, investment tools in the jurisdiction where they are tax resident. Complexities arise with how these plans are reported to the IRS, especially considering the substantial US tax penalties associated with non-compliance.
What is a Foreign Private Pension Plan?
Pension plans include state pensions, workplace pension plans and personal (private) pension plans. A pension is considered “foreign” when it is established and managed outside of the US The main distinguishing factor for a personal pension plan from a workplace or state plan is that the investor has a say in how the money is invested and will often have better control on how distributions are made from the plan. We come across several types of foreign private pension plans with the most notable being SIPPs and SASSs in the UK and Malta Pension Plans.
US Tax Treatment of private Foreign Pension plans
Generally, US pension plans are straightforward to report. However, a foreign personal pension plan may be viewed as a Foreign Grantor Trust (for US tax purposes) as the investor has a certain level of control over the investments and distributions and is considered the plan “owner.” The result is additional US tax filing requirements, and these are not always easy to navigate.
Double Tax Treaty Protection
The US/UK Double Tax Treaty assists by enabling a US tax-free roll up of earnings within a SIPP arrangement on the basis that a SIPP is considered a “qualified plan.” This is particularly useful when the pension plan owns foreign mutual funds and foreign collective type assets, as the “qualified” status allows the more onerous reporting of these underlying assets to be effectively ignored for US tax reporting purposes.
Malta Pension Plans have attracted recent IRS scrutiny when they were listed on the IRS’s annual “Dirty Dozen” list of common taxpayer “scams”. Taxpayers with Malta Pension Plans used the US/Malta Double Tax Treaty to contribute to the plan and make withdrawals from the plans using preferential pension benefits under the Treaty. In December 2021, the Competent Authorities of Malta and the US entered a Competent Authority Arrangement (CAA) under the Treaty stating that where US taxpayers established “personal retirement schemes,” with no limitation based on employment/self-employment earnings and were making contributions into the Malta pension plan in forms other than cash, then such plans were not really in the spirit of the Malta Pensions Act and therefore did not meet the intended goal of the Treaty. As a result, the Malta Pension Plan is not a “pension fund.” This position is being challenged. You can read more about that here.
US Tax Compliance and associated penalties:
Investment-based personal pension plans are generally treated as Foreign Grantor Trusts i.e., they are US tax transparent and the income gains/losses within the plan are passed directly onto its US owner. The reporting requirements for foreign pensions are often complex and may include the filing of the following US tax forms:
- Form 3520-A: For the foreign pension plan trustees to report details of the pension (trust) and this includes additional information to provide to the pension plan member so they may also complete their own US tax forms.
- Form 3520: For the US pension plan member to report their connection with a foreign pension plan.
- Form 8938: For the pension plan member to report details of their foreign financial assets, including foreign pensions, if they meet the filing threshold
(FBAR): For the pension plan member to report details of their foreign bank and financial accounts if they meet the filing threshold
- Form 8833: For the US plan member to claim any available Double Tax Treaty benefits exempting income and gains of their pension funds from current US income tax..
- Form 8621: The underlying assets of the foreign pension plan may invest in Passive Foreign Investment Company (PFIC). Simply, these are foreign mutual fund/collective type investments. Onerous tax implications can arise from owning PFIC investments.
Penalties for incorrect or missing US tax forms:
Penalties for Form 3520-A (greater of $10,000 or 5% of the pension value) and Form 3520 (greater of $10,000 or 35% of any property distributed from the plan) can be substantial.
The penalty for not filing an FBAR is $14,489 if non-wilful, and the greater of $144,886 or 50% of the account if the US taxpayer is found to be wilful in their non-compliance.
When to File US 2022 tax forms:
- Form 3520-A: By 15th March 2023. With an extension, 15th September 2023.
- Form 3520: By 17th April (or 15th June if the taxpayer lives abroad). With an extension 16th October 2023.
- Form 8938: By 17th April (or 15th June if the taxpayer lives abroad). With an extension 16th October 2023.
(FBAR): By 17th April. With an extension 16th October 2023.
- Form 8833: By 17th April (or 15th June if the taxpayer lives abroad). With an extension 16th October 2023.
- Form 8621: By 17th April (or 15th June if the taxpayer lives abroad). With an extension 16th October 2023.
How we can help:
US Individuals: We work with US taxpayers to assist them with their annual US tax compliance to report their foreign personal pension plan and foreign investments.
Providers/Trustees: We assist large and small pension providers who have US members invested in their foreign pension scheme. We support them in navigating their trustee obligations by preparing US tax forms (Form 3520-A) to submit to the IRS and providing their US members with Form 3520-A Foreign Grantor Trust Owner Statement (and supporting statements) to assist the US member to meet their personal US tax filing obligations in respect to the foreign pension plan.
We also partner with the pension fund providers/trustees to assist them with their internal systems to ensure good quality data, that is US tax compliant, is available to help them meet with their trustee obligations.