US taxation of foreign pensions, retirement plans, and social security-type benefits

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Attorney Robert Hanson, Sean O’Connor and I are offering much more extensive training for CLE/CPE credit with our friends at Strafford Publishing. We will be live on Tuesday January 22nd, 2019, but you will be able to watch on replay. The cost is $177 USD, but we are giving away three free passes. To enter to win, simply subscribe to this channel and leave a comment below telling us you want in. On January 18, 2019, we will be selecting 3 winners who can attend this training for free. Good luck!


So now, how do we figure out if your foreign pension is taxable and also, if it is reportable.

This is how we start our analysis

The first inquiry is if your foreign retirement it a defined benefit plan or a defined contribution.

With a defined benefit retirement plan you don’t have an account, do you? So can’t have an account value either right?? So we really shouldn’t see any requirements for foreign reporting forms like a Form 8938 and an FBAR as there are no numbers to put in. If we are dealing with a defined benefit retirement plan, typically our work is much easier and the consequences for getting something wrong are much less severe.


No if you do have a defined benefit plan, contributions into that plan are usually treated as income. Yet, unlike earned income, this income can typically not be excluded by the foreign income exclusion. However, foreign tax credits may still be available.

So if we don’t have a undefined benefit plan it must be a defined contribution plan. If so, the next question we ask is who funded most of it? The reason why is the IRS treats pension plans that are over 50% funded by the employee as foreign grantor trusts. The problem with this is that foreign grantor trusts can be very time consuming and expensive to properly report. A form 3520-A is likely required each year, and the penalty for not filing or filing incorrectly can be $10,000 per form per year. Additionally there could also be a Form 3520 requirement, where penalties can be even steeper.


Yet there is an exception that might apply. The 402(b) exception.

The problem is that the default position of the IRS is to reject 402(b) for everything BUT some Australian Superannuations and Singaporean CPFs. The reasoning is more baffling than you could imagine and we will get into that during our full presentation with Strafford. However, it is possible to get 402(b) treatment if your plan is something other than an Australian superannuation fund of Singaporean CPF. And this can save you thousands in tax prep fee alone each year!


So when are you going to be taxed?

For grantor trusts, you are taxed on the contribution and the growth, but not the distributions.
For employee trusts, you are taxed on both the contributions and the distributions, that is, in an employee trust you often are allowed to defer taxes.

Employer contributions to retirement plans are not excluded to the the FIE, but they are tax creditable. However, in many jurisdictions, there are no credits to apply.


So what questions do you have? Pleas leave them below and please, if you feel you need more detailed training join us live with Strafford on January 22, 2019.

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