Foreign Employment Pension Trusts & Form 3520
Foreign Employment Trusts & Form 3520: When a U.S. person has an interest in a foreign pension, that interest is considered an interest in a foreign trust. While technically foreign pensions are considered trusts, the question of whether they are reportable on Forms 3520/3520-A is still unclear. This is further complicated by the fact that recent Revenue Ruling 2020-17 exempts certain foreign tax-deferred trusts from 3520 reporting — but does not identify which specific foreign pensions are excluded. In addition, the employee does not necessarily own any portion of the trust per se — until it vests or is considered “available” under IRC 402 — so 3520 reporting may be overkill.
Finally, whether or not there is a tax treaty will impact the outcome of when the funds are available.
Let’s review some of the basics of foreign employment pension trusts & Form 3520.
Foreign Employment Pension Trust (in General)
The foreign employment pension trust analysis is complicated.
While presumably, foreign pensions are not what the IRS had in mind when they developed the form 3520 reporting requirements, many taxpayers still prefer to report the pension on Forms 3520/3520-A. The IRS has even exempted some foreign pensions specifically, such as the RRSP.
Many practitioners may believe it is duplicative and not necessary, and Revenue Procedure 2020-17 seems to support that notion.
*Before the expanded globalization of the U.S. economy, the RRSP was one of the primary types of foreign pensions (Canada) held by U.S. persons, and the IRS’ inclination was exclude it from reporting.
Self-Managed Foreign Employment Pension Funds
When a person has a self-owned pension fund, there are some more complexities to the analysis.
The most common scenario is the Australian Superannuation Fund, SMSF.
The SMSF is called a Self-Managed Superannuation Fund.
It is “Self-Administered” (or through a designated corporation) and therefore, there are some issues involving ownership, administration, and availability of funds.
Still, under the new Revenue Procedure 2020-17, even the SMSF may qualify as exempt.
RRSP Specifically Excluded from Form 3520
When it comes to the Canadian RRSP (Registered Retirement Savings Plan), which a very common foreign pension, the IRS previously issued a Revenue Procedure excluding the reporting of the RRSP on Form 3520.
The Form 3520 Instructions refers specifically to IRS Revenue Procedure 2014–55, which provides the following as an exemption to reporting:
“Transfers to, ownership of, and distributions from a Canadian registered retirement savings plan (RRSP), a Canadian registered retirement income fund (RRIF), or any other Canadian retirement plan that is within the meaning of section 3 of Rev. Proc. 2014-55. See Rev. Proc. 2014-55.”
Rev. Proc. 2014-15 Specific 3520 Exclusion Language
As provided by the IRS:
“Reporting Rules for a Beneficiary or Annuitant of a Canadian Retirement Plan.
Subject to any future guidance that may be issued by the Treasury Department and the IRS, beneficiaries (regardless of whether they are “eligible individuals” within the meaning of section 4.01 of this revenue procedure) and annuitants are not required to report contributions to, distributions from, and ownership of a Canadian retirement plan under the simplified reporting regime established by Notice 2003–75 (Form 8891) or pursuant to the reporting obligations imposed by section 6048 (Form 3520).
In addition, custodians are not required to file Form 3520–A with respect to a Canadian retirement plan.
This revenue procedure does not, however, affect any reporting obligations that a beneficiary or annuitant of a Canadian retirement plan may have under section 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. § 5314 and the regulations thereunder.”
2020-17 General Exceptions
With the globalization of the U.S. economy, and many U.S. persons having accrued foreign pension(s), the IRS needed to issue further guidance.
Since the IRS does not have time or resources to specifically exclude or exempt the reporting requirements of each foreign pension trusts, it instead promulgated Revenue Procedure 2020–17.
Rev. Proc. 2020-17 further limits reporting for many other types of foreign pension/employment trusts.
The Revenue Procedure provides a roadmap (winding at best) as to which types of foreign pensions (and non-employment tax deferred trusts) may be exempt from form 3520 reporting.
The revenue procedure also provides an avenue for Taxpayers to eliminate previously issued Form 3520 penalties for not report foreign employment trusts in prior years.
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