Foreign Retirement Plans: New IRS Exemption from Required Information Reporting on Forms 3520 and 3520-A

In recent IRS Revenue Procedure 2020-17, the IRS has created a procedure where certain U.S. persons having an interest in tax-favored foreign trusts established and operated exclusively or almost exclusively to provide pension or retirement, medical, disability, or educational benefits are exempt from Forms 3520 and 3520-A reporting.

U.S. persons must still file a Foreign Bank Account Report (FBAR), Form 8938, Statement of Specified Foreign Financial Assets, and report the income on Form 1040 Schedule B from these plans.

No Form 3520 or 3520-A Reporting for Certain Tax-Favored Foreign Trusts

The IRS and Treasury recognize that because certain tax-favored foreign trusts are subject to written restrictions (e.g., contribution limits, withdrawal consideration, and informational reporting imposed under local laws), it would be appropriate to exempt U.S. individuals from the requirement to provide information about these trusts under IRC Sec. 6048.

Who is Eligible for the Relief

An “eligible individual” is defined as an individual who is, or at any time was, a U.S. citizen or resident and who is compliant (or comes into compliance) with all requirements for filing a U.S. federal income tax return(s) covering the period such individual was a U.S. citizen or resident.

What Tax-Favored Foreign Retirement Trusts are exempt from reporting

Tax-favored foreign retirement trusts must generally have the following requirements:

1. The trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits. Rev. Proc. 2020-17, Sec. 5.03.
2. The trust generally must annually report information with respect to the trust to the relevant tax authorities in the trust’s jurisdiction. Rev. Proc. 2020-17, Sec. 5.03(2).
3. The trust must only permit contributions with respect to income earned from the performance of personal services. Rev. Proc. 2020-17, Sec. 5.03(3).
4. Contributions to the trust must: (a) be limited by a percentage of earned income of the participant, (b) be subject to an annual contribution limit of $50,000 or less, or (c) be subject to a lifetime contribution limit of $1,000,000 or less. Rev. Proc. 2020-17, Sec. 5.03(4).
5. Withdrawals from the trust must be conditioned upon reaching specified retirement age, disability, or death, or penalties must apply to withdrawals made before such conditions are met. However, an exception is provided for early withdrawals for hardship or educational purposes, or for the purchase of a primary residence. Rev. Proc. 2020-17, Sec. 5.03(5).
6. If the trust is employer-maintained, then certain additional requirements must be met:
   1. The trust must be nondiscriminatory insofar as a wide range of employees, including rank and file employees, are eligible to make or receive contributions or accrue benefits under the terms of the trust. Rev. Proc. 2020-17, Sec. 5.03(6)(i).
   1. The trust must actually provide significant benefits for a substantial majority of eligible employees. Rev. Proc. 2020-17, Sec. 5.03(6)(ii).
   1. The benefits actually provided under the trust to eligible employees must be nondiscriminatory. Rev. Proc. 2020-17, Sec. 5.03(6)(iii).  Although Rev. Proc. 2020-17 does not define the term “nondiscriminatory.”

A trust is not disqualified because it may receive a rollover from another tax-favored foreign retirement trust established and operated under the laws of the same jurisdiction.  Rev. Proc. 2020-17, Sec. 5.03(6).

Illustrations:

Examples of foreign retirement plans impacted by the new revenue procedure are below, but all foreign retirement plans need to be carefully reviewed and analyzed by experienced tax counsel against the relevant tax treaty and laws to analyze the need for filing form 3520/3520-A.

Australian Self managed superannuation fund (SMSF): Australian SMSF may likely not qualify for filing relief from 3520/3520-A.

New Zealand Kiwisaver: New Zealand Kiwisaver plans may not qualify under this relief procedure.

Hong Kong Mandatory Provident Fund (MPF): Hong Kong MPF funds may qualify for relief.

Swiss Pillar 3: Swiss Pillar 3 plans may qualify for relief.

UK Self-Invested Personal Pension (SIPP) plan: For United Kingdom SIPPs probably do no qualify relief.

Canadian Registered Education Savings Plans (RESPs): Canadian RESPs do qualify for relief. Those who previously filed 3520/3520-A for Canadian RESP no longer need to.

Canadian Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF): IRS Revenue Procedure 2014–55 provides that reporting of the RRSP and RRIF is not required for Form 3520.

While the new revenue procedure may exempt some foreign accounts from filing form 3520/3520-A, the income generated in the account should still be reported on Form 1040 Schedule B, accounts must be reported on FBAR FinCEN 114 and Form 8938. In addition, filing of Form 8621 for accounts invested in non-US mutual funds required if the balance exceeds the exception threshold.

In summary, taxpayers who believe they may be eligible for relief should consult with their tax advisors to assess whether their trust fits within the requirements of what constitutes an applicable tax-favored foreign trust under Rev. Proc. 2020-17. Taxpayers should also take steps to confirm that they are fully compliant with all U.S. income tax return filing and reporting requirements because compliance will ultimately determine their eligibility for penalty relief in various favorable voluntary disclosure programs.

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