Reporting Foreign Pension Plans on U.S. Tax Returns

One of the most perplexing topics for taxpayers with foreign accounts is understanding how to report them on their U.S. tax returns.

Taxation of foreign pensions — in general

Employees who contribute to a foreign (i.e., non-U.S) pension plan may be taxed on the both the contributions and accrued gain in their plans.

Foreign pension plans are not considered “qualified” for U.S. tax purposes under IRC 401(k). As such, they do not receive the tax benefits of U.S. pension plans.

Taxable contributions

Contributions to a foreign pension plan is taxable in the U.S. under IRC 402 if:

  1. the plan is “funded” for U.S. tax purposes, and
  2. the employee’s interest in the plan is vested in whole, or in part

Taxable accrued gain

The accrued gain in a foreign pension account may be also be taxable on a U.S. tax return.

Defined contribution plans

In a defined contribution plan contributions are made for the benefit of employees. Two requirements must “broad-based” under IRC 402.

A plans is “broad based” if all employees who meet participation requirements are permitted to join the plan.

If it is not “broad-based”, then a “highly compensated” employee in a vested pension plan will be taxed on the accrued gain in the pension plan during the year.

Defined benefit plans

A defined benefit plan in one in which an employer the retirement benefit based on a specified formula, such as a percentage of final average salary.

If the plan is not “broad based” under IRC 402, then a “highly compensated” employee will include on the vested accrued benefit during the year, which is generally the present value of the annual increase of the accrued benefit.

Distribution from pension plans

Distributions from foreign pension plans are generally taxable in the U.S.

The distributions are taxable, however, only to the extent that they exceed the basis. The basis generally includes amounts contributed by the plan participant and sometimes amounts contributed by the employer.

Relief under tax treaties

Various tax treaties provide relief. Types of relief provided include:

  • deferral of accrued gain
  • employer contribution may be excluded from U.S. taxable income
  • an employee contribution may be deductible from U.S. taxable income

You should review the applicable tax treaty to see if relief is provided, if any.

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