Certain US persons may become subject to the passive foreign investment company (PFIC) regime if…
Foreign pension accounts reporting on the FBAR
Several clients have asked us in recent weeks whether foreign pension accounts are reported on the FinCen114 (FBAR).
Most employer foreign pension plans fall under one of two types: defined benefit plan or defined contribution plan.
A defined benefit plan is generally an employer or government plan funded by the employer or government, which provides for a fixed benefit in case of retirement or death. In most cases, plan participants are not considered the legal owners, nor can they direct the investments or cause a disposition of funds. Moreover, you may not be able to ascertain the current value or balance of a defined benefit plan prior to retirement, or the foreign bank and financial accounts.
Are foreign pension plans reported on FBAR?
Some practitioners take the position that these plans do not need to be reported on the FBAR. We disagree.
A conservative approach would be to report it on the FBAR using a reasonable estimate – if the plan provides for a residual cash benefit payable to the beneficiaries upon the plan participant’s death before retirement age, this amount may be used as the balance to be reported on the FBAR. If you are currently receiving benefits under such a plan, you can report the total annual payments as the FBAR balance.
A defined contribution plan is funded by the employer and often the employee as well; the employee can often direct the investments within the plan. Additionally, defined contribution plans almost always have a readily-ascertained value or balance. Thus, defined contribution plans MUST be reported on your FBAR.
Several countries—such as Switzerland—have a tiered retirement scheme, with three pillars. The first pillar is often a social security-type program – a welfare program providing defined benefits for old age and disability. This type of plan is not FBAR-reportable. The second pillar is often an employer pension plan, funded by the employer and employee, which is FBAR-reportable. The third pillar is generally an individual or private retirement plan, which is also FBAR-reportable with bank and financial accounts.
While a social security style of retirement plan provided by a foreign government does not need to be reported on the FBAR, some foreign retirement plans are a hybrid of social security and foreign pension plan, along with bank and financial accounts. These are generally compulsory, government-managed funds with contributions from both the employer and employee.
Some common examples are the Provident Funds of India, Singapore, and Hong Kong. While Provident Funds are not utilized in the United States, the many Asian countries have some form of Provident Fund which is geared toward retirement. Despite the similarities with social security-type programs, these types of foreign pension plans must be reported on FBAR. There are many different types of provident funds, depending on which country you work in. Some of the more common types of funds include:
PPF – Public Provident Fund (India)
CPF – Central Provident Fund (Singapore)
CPF – Central Provident Fund (South Africa)
EPF – Employees Provident Fund (Malaysia)
EPF – Employees Provident Fund (Nepal)
TPF – Thailand Provident Fund (Thailand)
MPF – Mandatory Provident Fund (Hong Kong)
Beyond FBAR reporting, the taxation of accrued undistributed earnings are another major concern (and subject to exceptions and exemptions). Experienced legal counsel is advised to tackle this complex issue.
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