- 1 IRC 402, 404 & 404A Exception to Form 3520
- 2 402(b) Taxability of Beneficiary of Nonexempt Trust & Exception to Form 3520
- 3 404(a)(4) Trusts Created or Organized Outside the United States & Foreign Trust Filing Exception
- 4 404A Deduction for Certain Foreign Deferred Compensation Plans Exception to 3520 Trust Filing
- 5 International Tax Law Specialist Team: Golding & Golding
IRC 402, 404 & 404A Exception to Form 3520
IRC 402, 404 & 404A Exception to Form 3520: Generally, a transfer to a foreign trust can require the transferor to report the transaction on Form 3520. But, as with any good IRS requirement, there are also exceptions, exclusions and limitations. Form 3520 provides for certain code section exceptions, when the transfers refer to three (3) main scenarios:
Let’s review the IRC 402, 404 & 404A exceptions to form 3520 reporting
402(b) Taxability of Beneficiary of Nonexempt Trust & Exception to Form 3520
The first exception for transfers to foreign trust 3520 filing is under 402(b):
“(b) Taxability of beneficiary of nonexempt trust
Contributions to an employees’ trust made by an employer during a taxable year of the employer which ends with or within a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee’s interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section.
The amount actually distributed or made available to any distributee by any trust described in paragraph (1) shall be taxable to the distributee, in the taxable year in which so distributed or made available, under section 72 (relating to annuities), except that distributions of income of such trust before the annuity starting date (as defined in section 72(c)(4)) shall be included in the gross income of the employee without regard to section 72(e)(5) (relating to amounts not received as annuities).
(3) Grantor trusts
A beneficiary of any trust described in paragraph (1) shall not be considered the owner of any portion of such trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners).
(4) Failure to meet requirements of section 410(b)
(A) Highly compensated employees
If 1 of the reasons a trust is not exempt from tax under section 501(a) is the failure of the plan of which it is a part to meet the requirements of section 401(a)(26) or 410(b), then a highly compensated employee shall, in lieu of the amount determined under paragraph (1) or (2) include in gross income for the taxable year with or within which the taxable year of the trust ends an amount equal to the vested accrued benefit of such employee (other than the employee’s investment in the contract) as of the close of such taxable year of the trust.
(B) Failure to meet coverage tests If a trust is not exempt from tax under section 501(a) for any taxable year solely because such trust is part of a plan which fails to meet the requirements of section 401(a)(26) or 410(b), paragraphs (1) and (2) shall not apply by reason of such failure to any employee who was not a highly compensated employee during— (i)such taxable year, or (ii)any preceding period for which service was creditable to such employee under the plan.
(C) Highly compensated employee For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).”
What does the 402(b) Exception Mean
When Transfers are made into certain foreign trusts that are employment in nature, it may not be reportable on Form 3520. For this particular exception under 402 (b), the employer contributions into a trust (presuming it was a foreign trust) are not required to be disclosed by the employer on form 3520.
404(a)(4) Trusts Created or Organized Outside the United States & Foreign Trust Filing Exception
The next exceptions for transfers to foreign trust 3520 filing.
- “If a stock bonus, pension, or profit-sharing trust would qualify for exemption under section 501(a) except for the fact that it is a trust created or organized outside the United States, contributions to such a trust by an employer which is a resident, or corporation, or other entity of the United States, shall be deductible under the preceding paragraphs.”
What does the 404 (a)(4) Exception Mean
In accordance with this code section 404(a)(4), if the trust would otherwise qualify as a US pension trust aside from the fact that it was foreign based — employers who make contributions to these types of trusts do not need to file a form 3520 for this particular transaction
404A Deduction for Certain Foreign Deferred Compensation Plans Exception to 3520 Trust Filing
The final exception for transfers to foreign trust 3520 filing is under 404A.
Provided in pertinent part:
“(a) General rule
Amounts paid or accrued by an employer under a qualified foreign plan—
(1) shall not be allowable as a deduction under this chapter, but
(2) if they would otherwise be deductible, shall be allowed as a deduction under this section for the taxable year for which such amounts are properly taken into account under this section.
(b) Rules for qualified funded plans
For purposes of this section—
(1) In general Except as otherwise provided in this section, in the case of a qualified funded plan contributions are properly taken into account for the taxable year in which paid.
(2) Payment after close of taxable year
For purposes of paragraph (1), a payment made after the close of a taxable year shall be treated as made on the last day of such year if the payment is made—
(A) on account of such year, and
(B) not later than the time prescribed by law for filing the return for such year (including extensions thereof).
In the case of a qualified funded plan, the amount allowable as a deduction for the taxable year shall be subject to—
(A) in the case of—
(i) a plan under which the benefits are fixed or determinable, limitations similar to those contained in clauses (ii) and (iii) of subparagraph (A) of section 404(a)(1) (determined without regard to the last sentence of such subparagraph (A)), or
(ii) any other plan, limitations similar to the limitations contained in paragraph (3) of section 404(a), and (B)limitations similar to those contained in paragraph (7) of section 404(a).
(A) the aggregate of the contributions paid during the taxable year reduced by any contributions not allowable as a deduction under paragraphs (1) and (2) of subsection (g), exceeds
(B) the amount allowable as a deduction under subsection (a) (determined without regard to subsection (d)), such excess shall be treated as an amount paid in the succeeding taxable year.
(5) Amounts must be paid to qualified trust, etc.
In the case of a qualified funded plan, a contribution shall be taken into account only if it is paid— (A)to a trust (or the equivalent of a trust) which meets the requirements of section 401(a)(2), (B)for a retirement annuity, or (C) to a participant or beneficiary.”
What does the 404A Exception Mean?
In conjunction with the two above referenced previously summarized exceptions, 404A further expands upon contributions made by foreign employer into a foreign deferred compensation pension type trust .
In conclusion, while the IRS strictly enforces compliance with form 3520 and 3520-A, there are some exceptions, and this group of exceptions summarized here refers to deferred compensation and pension plan contributions. the rules change often, so it is important to always double check the statute common regulations, etc. before relying on an exception.
International Tax Law Specialist Team: Golding & Golding
We hope these Form 3520 examples have been helpful.
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A and meeting the exceptions for transfers to foreign trust 3520 filing.
Contact our firm today for assistance with getting compliant.