Foreign Pensions from a U.S. Tax Perspective

Your Guide to State, Local, Federal, Estate + International Taxation

As the IRS continues to increase their focus on exposing hidden foreign accounts of U.S. taxpayers, it is important to be aware of all filing requirements and be in compliance to avoid excessive penalties. One area that is commonly missed is foreign pensions. Many taxpayers assume if they hold a foreign pension that has no distributions and is not taxed in their home country, it will be tax-free in the U.S. as well. Many times this is not the case.

Depending on the plan, and absent a treaty exception, U.S. taxpayers may be taxed currently on the plan’s accretion of benefits and/or the employer’s contributions. In many cases, the local country will defer taxation on the contributions and accretion, thus causing a mismatch of foreign tax credits on the distributions.

In addition to reporting the income from certain pensions, taxpayers will need to review the reporting requirements for forms FinCen 114, 8938, 8621, and 8891. If the pension plan is considered a foreign grantor trust, forms 3520 and 3520-A may also be required. In general, pension plans are set up like trusts in that a fiduciary holds and administers the pension plan assets for the benefit of the plan’s participants and beneficiaries. If the private pension plan is characterized as a foreign trust under IRC 679, forms 3520 and 3520-A will need to be filed and the taxpayer will need to pay tax on the accretion of income earned in the plan each year. There may be exceptions if the plan is non-discriminatory and the plan holder is not a highly compensated employee.

Certain countries have taxpayer friendly treaty articles that specifically allow for the deferral of qualified pension income. As this is a highly complex topic, please consult with a knowledgeable tax professional if you have a foreign pension plan to determine your reporting requirements.

By Jill A. Helm, CPA