US Tax Treatment of a Self-Managed Superannuation Fund (SMSF)
US Tax Treatment of a Self-Managed Superannuation Fund (SMSF): When it comes to reporting foreign pension in the United States for US tax and IRS purposes, it gets very complicated. That is because most foreign pensions do not qualify as exempt under 401/402(a) and are therefore subject to a potential 402(b) scenario.
Complicating the matter even further is the ambiguity of reporting foreign pension plans on form 3520-A (it is well-established that foreign pensions are reportable on the FBAR and Form 8938).
With the Australian Self-Managed Superannuation Fund there are a few key issues:
- Form 3520-A Requirement
- Impact of HCE rules
- Rev Proc 2020-17
- Taxation rules
Form 3520-A & Self-Managed Superannuation Fund (SMSF)
Form 3520-A is used to report foreign trusts that have at least one US owner. In breaking down that definition, the first issues whether a foreign pension is considered a foreign trust.
Is SMSF a Foreign Trust?
By definition, an SMSF would be, because the employer would be the trustor, the administrator would be the trustee, and the employees are the beneficiaries.
When it comes to a Non-SMSF Superannuation, a Taxpayer can take the position that the 3520-A is not required, because the Superannuation is an employment trust (even if non-exempt under 402(b).
And, because the employer is the Trustor of the trust, the 3rd party administrator is the trustee, and the employee is the beneficiary – there is no employee who is a per se owner of the trust.
While the employee technically “owns” his or her share of their earnings in the trust, taking the position that accrued benefits in an employment trust imputes ownership of the trust for 3520-A purposes, to the employee may be a stretch.
*If the Employee contributes more than 50%, it may transmute into a grantor trust, with the employee owning a portion subject to 3520-reporting.
SMSF U.S. Tax Treatment
With the self-managed superannuation fund, it can get more complicated.
With an SMSF the fund is “self-managed.” The mere fact that it is self-managed does not mean that the employee “owns” the fund. Rather, it means the employee/other qualified members serve as the trustee of the fund (or via a corporate trustee).
Thus, just because a U.S. person employee has their own SMSF would not per se make it reportable on Form 3520-A as an “owner of the foreign trust.”
Rather, the main complication becomes when the SMSF involves a Self-employed person.
Under that circumstance, the employee may be considered the owner of the trust, since the U.S. person owns a stake in the company.
Issues such as CFC will further complicate the analysis.
SMSF & HCE (Highly Compensated Employee)
The HCE rules come into effect for growth within a retirement fund which would otherwise be tax deferred, such as a 401K.
Generally, the growth within a foreign pension may avoid U.S. tax if:
- A Tax Treaty provides that pension earnings are taxed at distribution
- The Trust qualifies under 401 as qualified and exempt under 402 (a)
- Trust qualifies under 402(b) and the growth is not technically made “available.
Presuming the growth is otherwise deferred, the HCE rules supersede these rules.
Under IRC 410, if the HCE rules kick in, then then otherwise tax deferred growth is now taxable to the HCEs to the extent of the income attributed to their ownership of the trust.
Rev Proc 2020-17 & SMSF
Under Revenue Procedure section 2020-17, certain foreign deferred trusts can escape having to file Form 3520-A.
The revenue procedure does not state specifically which foreign trusts may be exempt from reporting, but we have summarized how the SMSF may be impacted.
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