Changes to foreign pensions for US taxpayers – or not?

The IRS has released new rules regarding Foreign Pensions, detailed in Revenue Procedure 2020-17. The Revenue Procedure stipulates that Forms 3520 and 3520A are no longer required for certain self-funded pension plans held under trust. This would include UK Self Invested Pension Plans (SIPPs), which many of Buzzacott’s clients have. 

If you own this type of pension, in order to qualify for the exemption you must be US tax compliant and the pension must be qualified as a recognised pension in a foreign jurisdiction. 

Qualifying requirements

To qualify for the reporting exemption, the Revenue Procedure stipulates that pensions would need to satisfy certain legal requirements, which include:

1. The underlying income and gains within the pension must be generally exempt from income tax in the pension’s jurisdiction, with the tax instead being deferred to distribution. 
2. Contributions to the trust must attract tax benefit. 
3. There must be annual information reporting requirements to the relevant tax authorities in the pension’s jurisdiction.
4. Only contributions with respect to income earned from employment or self-employment are permitted. 
5. Contributions must be limited to a percentage of earned income, subject to an annual limit of $50,000, or subject to a lifetime limit of $1,000,000.
6. Withdrawals, distributions or payments must be conditioned on reaching certain specified retirement age, disability or death, otherwise penalties will apply if the conditions are not met.
7. For employer-maintained plans, the pension must be non-discriminatory – so open to all employees on similar terms.

In simple terms, neither criteria 4 or 5 are met by SIPPs. People not working can still contribute up to £3,600 to SIPPs, so you can contribute regardless of employment. In fact, contributions are not limited at all, rather the UK tax relief is. 

So what should you do until the IRS provides further clarification?

It may very well have been the intention of the Revenue Procedure to eliminate the 3520/3520A requirement for foreign pensions such as UK SIPPs, but at this stage we disappointingly conclude that it doesn’t. We have raised some questions directly to the author of the Revenue Procedure, though we are yet to hear back. Once we do, we’ll update this article.

It should however be noted that the Revenue Procedure does cement our basis for preparing Forms 3520A and 3520 for a personally funded foreign pension held under trust, which is not a view held by all preparers. We are of the opinion that it may still make sense to continue to file these forms until we have more information and hopefully more news from the IRS.