- 1 IRS Tax Treatment of Foreign Employer Pension Contributions
- 2 3 Common Examples of Foreign Employer Pension Contribution
- 3 US UK Treaty (Pensions, Article 18)
- 4 CPF Retirement (No Treaty, IRS Memo)
- 5 Australian Superannuation
- 6 U.S. Employer 401K Contributions as an Example (U.S. Tax Law)
- 7 U.K. Employer and a U.S. Person (Tax Treaty – Article 18, Paragraph 5)
- 8 Singapore Employer (CPF) and a U.S. Person (No Tax Treaty)
- 9 IRS Memo on Employer Contributions
- 10 What is a Totalization Agreement?
- 11 Stop and Review
- 12 Totalization Agreement & Taxing Employer Super Contributions
- 13 If a Super is Treated Like a Social Security
- 14 If a Super is Treated Like a Retirement/Pension
- 15 Golding & Golding, A PLC
IRS Tax Treatment of Foreign Employer Pension Contributions
Over the past few years, there have been a myriad of issues involving the U.S. taxation of Foreign Pension Contributions and IRS tax treatment of employer contributions.
IRS Tax Treatment of Foreign Employer Pension Contributions
The common situation is when a U.S. person resides overseas, and has a foreign employer contributing to a foreign retirement plan.
Even if the foreign retirement plan is 401K-type equivalent, that does not mean the U.S. Person enjoys the same tax-free status on the contribution.
3 Common Examples of Foreign Employer Pension Contribution
- UK Retirement
- Singapore CPF
- Australian Superannuation
Let’s start from more clear to less clear…
US UK Treaty (Pensions, Article 18)
If you are a U.S. Citizen in the UK, earning a pension from your UK based employer, you should take notice of this analysis:
“(5) (a) Where a citizen of the United States who is a resident of the United Kingdom exercises an employment in the United Kingdom the income from which is taxable in the United Kingdom and is borne by an employer who is a resident of the United Kingdom or by a permanent establishment situated in the United Kingdom, and the individual is a member or beneficiary of, or participant in, a pension scheme established in the United Kingdom.”
Non-Technical Translation Article 18 (5)
When a U.S. citizen resides in the United Kingdom and works for a UK based UK employer, if the U.S. citizen is part of a pension scheme in which the employer participates in, then the US. Citizen may be entitled to certain benefits.
CPF Retirement (No Treaty, IRS Memo)
Even though the CPF is mandatory (under most cirumstances) in Singapore, the contributions are taxable.
While the SSA (Social Security Administration) refers to the CPF as privatized social security, the U.S. and Singapore do not have a bilateral tax treaty or totalization agreement in place.
The rules involving the superannuation and employer contributions are very difficult.
Many practitioners seem to comingle to two different areas of tax (retirement and social security), and make a leap that something is not taxable, when the IRS has not expressly stated that fact (hopefully it will happen, it just hasn’t happened yet).
Like the telephone game, while the initial practitioner who authors the article takes a valid (and well thought out) position, the lesser-experienced practitioners who just pilfer information from other more experienced attorney websites just confuse the concept — and then confuse the general public.
Anyone can just paste what they read on Wikipedia on their own site — that does not make them an expert…
Our hope is whether it is Social Security or Pension — Employer Contributions should be excluded from U.S. Tax
U.S. Employer 401K Contributions as an Example (U.S. Tax Law)
Michelle works for Apple. She receives a nice salary, and she maximizes her 401K. Michelle is not taxed on the employer contributions to her 401K, since they are by definition, tax-deferred. (She will be taxed at later day, when she takes distributions at retirement — and presumably when she is a in a lower tax bracket). That is the benefit — deferred tax.
U.K. Employer and a U.S. Person (Tax Treaty – Article 18, Paragraph 5)
David works in the U.K. He is a U.S. Person who works for a U.K. company. The U.K. company contributes to his U.K. retirement. David may be able to exclude the U.K. employer contributions on his U.S. Tax Return. (This is rare for a tax treaty, but the U.K. and U.S. have a very strong tax treaty, with additional details on pension)
Singapore Employer (CPF) and a U.S. Person (No Tax Treaty)
Daniel is a U.S. Person who works in Singapore for a Singaporean Employer. His Singaporean employer is required to withhold wages for the CPF (Mandatory/Compulsory retirement). The wages that are deposited into the CPF are not deductible on a U.S. Tax Return.
*This is despite the fact that the SSA refers to CPF as a form of “privatized social security.”
IRS Memo on Employer Contributions
What is a Totalization Agreement?
The Totalization Agreement is designed to ensure that individuals who may be a citizen of one country, but working in the other country, are not stuck with additional or duplicate social security tax.
It has nothing to do with private pension.
Stop and Review
-The Totalization Agreement has nothing to do with retirement (per se)
– Just because a Totalization Agreement refers to an item as privatized Social Security does not mean it will be deemed social security in the U.S. (e.g., CPF). A lack of treaties with Singapore may be to blame.
– The Superannuation is not per se Social Security. Yes, the SSA (Social Security Administration) identifies a Super as privatized social security and there is a Totalization Agreement, but the IRS has not per se indicated that a Super will be treated as social securityt. There are many distinctions between a Super and Social Security, and just because there are mandatory contributions (super-guarantee) does not make it social security per se.
Totalization Agreement & Taxing Employer Super Contributions
If the IRS does not deem the superannuation guarantee contributions as social security, it would be considered a pension.
Unlike the UK Tax Treaty, there is no specific exclusion of foreign employer contributions for U.S. tax purposes.
Stated another way: If a Super is considered a private pension, the bilateral tax treaty does not include a specific provision, similar to the US UK Treaty, mandating the exclusion of Foreign Employer Pension Contributions for a U.S. person.
If a Super is Treated Like a Social Security
The employer guarantee may be excluded.
If a Super is Treated Like a Retirement/Pension
Absent a specific provision in the Tax Treaty, the contributions may be considered taxable.
No matter what, the Super, CPF and UK Retirement/Pension accounts are all reportable on the U.S. Tax Return, FBAR, FATCA, etc.
Golding & Golding, A PLC
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.