U.S. Taxation of Foreign Pension Plans

Overview of Foreign Pension for U.S. Taxpayers

It is very common for U.S. Taxpayers who are considered U.S. Persons for tax purposes to have worked or been employed in a foreign country and accumulated foreign employment retirement/pension over their lifetime — or possibly invested in a personal retirement fund in a foreign country as a way to supplement their retirement income. Foreign retirement schemes are treated much differently under U.S. tax law than their U.S. retirement plan counterparts. There are many complexities involving the reporting of foreign retirement plants.

Some of the more common questions are:

• • • Is it an employment pension plan or personal pension plan?

    • Is it located in a treaty country or a non-treay country?

    • Is there tax-deferred status in the foreign country, and

    • Is the retirement specifically excluded for certain types of reporting in the U.S.?

For Taxpayers who have ownership of foreign retirement plans and/or pension plans, it is important to note that there are many different international information reporting forms that the Taxpayer may have to file to be compliant with the Internal Revenue Service’s rules and regulations.  Some of the more common forms that Taxpayers may have to file to report their foreign retirement plan include:

• • • FBAR (FinCEN Form 114);

    • Form 8938 (FATCA);

    • Form 3520/3520-A; and

    • Form 8621

Let’s walk through the basics of foreign pension plan taxation and how to report foreign pension plans to the IRS.

*Golding & Golding previously published the U.S. Taxation of Foreign Pension Plans article back in 2016 and has since updated and expanded the summary in 2020, 2022, and 2024.

First, Employment Retirement vs Personal Retirement

One of the preliminary questions that a Taxpayer must consider in determining how to report a foreign retirement plan — and which tax forms to file — is whether or not the retirement plan is an employment retirement plan or a personal retirement plan (or an employment retirement plan that was moved to a personal retirement plan). The U.S. government generally provides better tax treatment for employment-based retirement plans (through U.S. tax treaties) such as a 401-K equivalent than it does for personal retirement plans where the foreigner invests in foreign mutual fund-wrapped ‘personal’ retirement plans.

Treaty vs Non-Treaty

The next key issue the Taxpayer must consider is whether or not the retirement plan is located in a treaty country or a non-treaty country. In general, foreign retirement plans located in treaty countries will receive better treatment for tax purposes than they will in a non-treaty country. A common example would be the Australian Superannuation (which is located in a treaty country) as opposed to a Singaporean CPF or Malaysian EPF (which is not located in a treaty country). When there is no applicable tax treaty, the general rule is that the growth within a foreign retirement plan is taxable.

Form 1040 Tax Document

Form 1040 is the primary document in a U.S. individual’s tax filing. Foreign retirement earnings are reported on Form 1040 just as if it were a domestic retirement. Noting, that the tax implications of a foreign retirement and a domestic retirement may be different — but at the end of the day, retirement income is reported on Form 1040.

FBAR (FinCEN Form 114)

The FBAR is used to report foreign bank and financial accounts. The term ‘financial accounts’ is very broad and involves all different types of foreign accounts — including retirement plans.

As provided by the IRS:

• • • “Example: Canadian Registered Retirement Savings Plan (RRSP), Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro) and Mexican Administradoras de Fondos para el Retiro (AFORE) are foreign financial accounts reportable on the FBAR.”

Form 8938 (FATCA)

FATCA is the Foreign Account Tax Compliance Act. FATCA was introduced in 2012 on the 2011 tax return. For reporting purposes, Taxpayers file Form 8938 to report their specified foreign financial accounts. Similar to the FBAR, FATCA Form 8938 requires the Taxpayer to report foreign retirement plans:

As provided by the IRS:

• • • “If you are required to file Form 8938, in addition to reporting retirement and pension accounts and nonretirement savings accounts described in Regulations section 1.1471-5(b)(2)(i), you must report retirement and pension accounts, nonretirement savings accounts, and accounts…”

Form 3520-A/3520

This is where foreign retirement reporting tends to get more complicated. From a baseline perspective, Forms 3520 and 3520-A are used to report foreign gifts, foreign inheritance, and foreign trusts. At first glance, it would not appear that Form 3520/3520-A is required to report a foreign retirement — but the problem lies in the fact that technically, a foreign retirement plan can be considered a foreign trust. As a result, in some circumstances, the Taxpayer may have to file these forms to report their foreign retirement. Presumably, the U.S. government did not develop these forms to require Taxpayers to report their foreign retirement plans, which is why the U.S. government has also developed various Revenue Procedures and even proposed foreign trust regulations in 2024 that seek to limit the reporting of foreign retirement on these two forms.

Revenue Procedure 2014-55

This Revenue Procedure specifically refers to Canadian Registered Retirement Savings Plans and RRIF. While these types of retirement plans are still reportable on the FBAR and Form 8938, they are not reportable for Form 3520/3520-A as foreign retirement plans.

Revenue Procedure 2020-17

With the globalization of the U.S. economy, it is simply not feasible for the United States government to prepare separate revenue procedures for every country-specific type of retirement plan similar to how they did for the Canadian Retirement Plans. Therefore, the U.S. government published a catch-all revenue procedure to assist Taxpayers with tax-deferred retirement and non-retirement savings plans which serves to help minimize the reporting on Form 3520 and Form 3520-A — but does still require the reporting of foreign retirement plans on the FBAR and Form 8938.

Proposed Foreign Trust Regulations

In addition to the recent Revenue Procedure 2020-17, in 2024 the IRS released certain proposed regulations involving foreign trusts, and these regulations expanded upon the above-referenced revenue procedure to help minimize the reporting requirements for foreign retirement plans on forms 3520 and 3520-A.

Form 8621

Form 8621 is used to report Passive Foreign Investment Companies (PFIC), which includes foreign mutual funds and foreign ETFs. There are certain exceptions to having to file Form 8621 and sometimes the foreign retirement plans can fall into those exceptions. Otherwise, the taxpayer may have to parse out each fund within their foreign retirement plans and include it on their tax return (this is typically in situations in non-treaty countries that do not qualify for any other exception).

Common Foreign Retirement Examples

Here are a few common examples to consider for reporting purposes.

Treaty Country Employment Pension

• • • Michelle is a U.S. person who previously worked in Australia but relocated to the U.S.. Since she worked in Australia, she accrued retirement, including superannuation. This type of retirement is reportable on her U.S. tax return even though it is a treaty country and even though she is not taking any distributions or made any contributions to the superannuation since becoming a US person.

Non-Treaty Country Employment Pension

• • • Denise is a US person who lives overseas. Denise previously worked in Hong Kong and accrued a significant amount of retirement income in her Hong Kong Provident fund. Denise is required to report the Provident Fund on her U.S. tax return and she may have some additional reporting since Hong Kong is a non-treaty country. As a result of being in a non-treaty country, she does not receive certain protections or qualify for certain exceptions that a treaty country retirement plan may qualify for.

Treaty Country Personal Pension

• • • Ben is a U.S. Person who previously worked in a foreign country and invested in his own personal retirement plan. Once Ben relocated to the United States, he stopped making any contributions to the foreign retirement plan and has not received any distributions either, but the plan consists primarily of foreign mutual funds and ETFs. Ben will have to report this information on his tax return and must to do a deep dive into the type of investments held in the retirement plan to see if it qualifies as a retirement plan — and qualify for certain PFIC reporting exceptions.

Foreign Pension/Insurance

• • • Fran previously worked in Switzerland where she accrued Pillar two (2) and Pillar three (3) retirement savings. Once she left Switzerland, the Foreign Financial Institution (FFI) would no longer house her investments, so they were transferred into insurance policies instead of retirement plans. Depending on how far back she has to go for the reporting, she may have a more complicated reporting requirement since there are different reporting components for retirement plans and life insurance policies — even though the life insurance policy was previously a retirement plan.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

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Contact our firm today for assistance.