US Reporting of Foreign Retirement Accounts
Many clients contact our office regarding the failure to report their foreign retirement account. Such accounts need to be fully reported on an FinCen 114 (FBAR) and IRS Form 8938.
Besides the need to disclose a foreign retirement plan on an FBAR and Form 8938, U.S. beneficiaries of foreign retirement plans may need to disclose the plan on Form 3520 and Form 3520-A. By way of background, U.S. persons are required to file Form 3520 Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Gifts or Form 3520-A Annual Information Return of Foreign Trust With a U.S. Owner or both in situations where transactions with foreign trusts are conducted.
Form 3520 generally must be filed within 90 days of certain “reportable events” such as the creation of any foreign trust by a U.S. person or when a U.S. person transfers any money or property (directly, indirectly, or constructively) to a foreign trust. If any U.S. person beneficiary receives (directly, indirectly, or constructively) a distribution from a foreign trust during a tax year, that person is required to make a return with respect to the trust using IRS Form 3520, show the name of the trust, the amount of the aggregate distributions received, and any other data the IRS may require under Internal Revenue Code Section 6048(c). Each U.S. person treated as an owner of any portion of a foreign trust under Internal Revenue Code Sections 671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and that the required annual statements are provided to its U.S. owners and U.S. beneficiaries. The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust. A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements as provided under Internal Revenue Code Section 6048(b).
In some cases, a foreign retirement plan can be classified as a foreign trust. Consequently, any contributions (directly, indirectly, or constructively) in the form of cash or other property by a U.S. beneficiary to a foreign pension plan can trigger a Form 3520 (and Form 3520-A) reporting requirement. In addition, a distribution from a foreign pension plan (directly, indirectly, or constructively) to a U.S. beneficiary can result in a requirement to file Form 3520 and Form 3520-A.
As with FBARs and Form 8938, the penalty associated with not timely for not filing a Form 3520 and Form 3520-A is substantial. The penalty for not timely filing a Form 3520 is equal to $10,000 or 35 percent of the gross reportable amount” whichever is greater. The penalty for not timely filing a Form 3520-A is the greater of $10,000 or 5 percent of the gross reportable amount of the trust.
There are a number of exceptions to the 3520 and 3520-A reporting requirements. For example, Canadian Registered Retirement Savings Plans (“RRSP”) are not required to be disclosed on Form 3520.
IRS Rev. Proc. 2020-17 provides an important exemption to disclosing certain foreign retirement plans on Form 3520 and Form 3520-A for “applicable tax-favored foreign trusts.” Tax-favored foreign retirement trusts 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.
2) The trust generally must annually report information with respect to the trust to the relevant tax authorities in the trust’s jurisdiction.
3) The trust must only permit contributions with respect to income earned from the performance of personal services.
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.
5) Withdrawals from the trust must be conditioned upon reaching a 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 education purposes, or for the purchase of a primary residence.
6) If the trust is employer-maintained, then certain additional requirements must be met: a) 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; b) the trust must actually provide significant benefits for a substantial majority of eligible employees, c) the benefits actually provided under the trust to eligible employees must be non-discriminatory.
Any U.S. owner of a foreign retirement plan should carefully review the 3520 and 3520-A rules governing the reporting of these plans to determine the applicable filing requirements.
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