US Taxation of Swedish Pension Plans

US Taxation of Swedish Pension Plans

US Taxation of Swedish Pension

US Taxation of Swedish Pension Plans: The U.S. has entered into multiple tax treaties with Sweden. The pension plan system in Sweden is the common three (3) Pillar structure. In accordance with the World Bank Pillar framework (which recently transitioned from a three pillar to five pillar system), the Sweden pension system has three components to it:

• Pillar 1: State Pension Scheme
• Pillar 2: Occupational Pension
• Pillar 3: Voluntary Private Savings

Sweden has one of the more impressive pension plan systems across the globe.

The U.S. Tax liability and IRS Reporting for the Swedish Pension of a U.S. Person will differ than how the pension is taxed in Sweden.

Generally the Pillar 1 is characterized as social security, while Pillars 2 and 3 are treated as “pension.”

We will summarize US Taxation of Sweden Pension Plans.

Reporting on FBAR, FATCA, 3520, and 8621

Beyond the US Taxation of Sweden Pension, is the equally complicated concept of reporting the pensions. Foreign pensions may be reported on various forms, such as:

• FBAR (FinCEN Form 114)
• Form 8938 (FATCA)
• Form 8621 (PFIC)
• Form 3520 (Trust)

We will summarize if a Swedish Pension Plan is Taxable in the US, and how the reporting rules work.

Pillar 1 (Social Assistance)

US Taxation of Sweden Pension begins with Pillar 1.

Pillar 1 is social assistance, and is similar to U.S. Social Security.

As provided by the European Commission:

“In Sweden, you get different types of pension. From the Swedish Pensions Agency, you receive the public pension (allmän pension) which is based on your pensionable income. The majority of people also receive an occupational pension from their employer. In addition to this you can have an optional private pension.

Normally the higher your salary and the later you retire, the higher your pension will be. But this also depends on the growth of the funds in which parts of the pension are invested.

There is a limit to the pensionable income used for the calculation of the public income-related pension that you can receive. The limit is SEK 483,000 (7.5 times the income base amount). There is also a guarantee pension if you have low or no income pension, which is an Article 58-benefit.

The public pension is recalculated every year to follow price and income developments. The pension types mentioned in this chapter are taxable unless otherwise stated.

Pension conditions can also vary depending on when you were born. If you were born before 1938, you are covered by the old ATP system. If you were born after 1953, the new system applies. If you were born between 1938 and 1953 you are covered by both systems.”

Public pension

Public pension consists of income pension, premium pension and in certain cases guarantee pension. Everyone who has worked and lived in Sweden receives the public pension which as a rule is based on your pensionable income. This is income you have paid tax on, such as salary, unemployment benefits and parental allowance.

Every year 18.5% of your pensionable income is earmarked for your retirement pension. 16% goes to your income pension, and the remaining 2.5% to the premium pension. The latter is money that is placed in funds that you actively can choose yourself. If you make no choice, the money is placed in a pre-selected fund.

Everyone born in 1938 or later has the right to income and premium pension provided that they have had pensionable income. If you were born before 1938, you instead receive supplementary pension based on your best 15 income years. If you were born between 1938 and 1953, you receive both income pension and premium pension and supplementary pension.

If you have had a small pensionable income, you can receive guarantee pension, financed by the state, as an addition to the income pension. The guarantee pension is an Article 58-benefit if you also have been working/living in other EU/EEA-countries. If you were born in 1938 or later, you must have turned 65 to receive guarantee pension. You should have lived in Sweden for at least 40 years from the year you turned 16 until you turned 64 to receive full guarantee pension (40/40).

If you have lived in Sweden for a shorter time, the guarantee pension is reduced by 1/40 for every missing year. If you also have insurance periods in other EU/EEA-countries, also those periods are taken into account when calculating the guarantee pension. To be entitled to guarantee pension, you must have been resident in Sweden for at least 3 years. For those born before 1938, other rules apply. You can have the right to guarantee pension, for example if you were entitled to national old-age pension or pension supplement under the old system.

There is no fixed retirement age, it is flexible. You can take out your retirement pension from 61 years of age at the earliest and there is no upper age limit. You have the right to work until you are 67, but you can also work for longer if you and your employer agree on this and continue to earn pension rights.”

*Unlike many other countries, the contributions to social security are deductible/credited to the Employee on their tax return

Individuals do not have specific ownership of their contribution portion as they do with a Pillar 2 or Pillar 3 pension, like a 401K plan or IRA.

Totalization Agreement

The U.S. and Sweden have entered into a Totalization Agreement. The agreement prevents the taxpayer from paying into two social security systems.

As provided by the Agreement:

An agreement effective January 1, 1987, between the United States and Sweden improves Social Security protection for people who work or have worked in both countries. It helps many people who, without the agreement, would not be eligible for monthly retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

For the United States, the agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability and survivors insurance benefits. It doesn’t cover benefits under the U.S. Medicare program or the Supplemental Security Income (SSI) program.

For Sweden, the agreement applies to retirement, disability and survivors benefits under Sweden’s basic and supplementary pension programs and to the taxes that must be paid under those programs. The agreement doesn’t affect benefits or tax liability under other Swedish programs such as health insurance, unemployment insurance, work accident, occupational illness insurance or family allowance benefits.

Pillar 2 (Occupational Pensions)

Pillar 2 is the occupational pension in Sweden, which is funded through employment.

There are various categories of pensions in Sweden that are considered Pillar 2, depending on whether the employment and the industry.

Some of the programs are funded through agreements in specific areas of industry, and other fund are funded developed through various foreign institutions.

In Sweden, the employee can deduct the contributions to the pension fund up to a certain amount.

The taxation rules are detailed below under the Treaty analysis portion of this article.

Pillar 3 (Private Pensions)

Pillar 3 is essentially just individual options at various banks and financial institutions.

One common Swedish vehicle for private retirement savings is the ISK or other insurance policy.

U.S. Sweden Tax Treaty (Article 19 Pension)

The Tax Treaty between the U.S. and Sweden on the issues of Pensions is well-suited for cross-border taxpayers.

Let’s go through it:

Pension Distributions & Contributions

The treaty sets out various pension distribution rules under Article 18.

Article 19, Paragraph 1 (General Provision)

“Subject to the provisions of Article 20 (Government Service) and of paragraph 2 of this Article, pensions and other similar remuneration in consideration of past employment and annuities derived and beneficially owned by a resident of a Contracting State shall be taxable only in that Contracting State.”

This paragraph provides that generally, the resident state has the sole (only) right to tax the pension. For example, a person residing in the U.S. with a pension from Sweden would be taxed in the U.S.  

Article 19, Paragraph 2 (Social Security)

“Notwithstanding the provisions of paragraph 2 of Article 20, pensions (including the Swedish “allmän tilläggspension”) and other benefits paid out under provisions of the social security or similar legislation of a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.”

This paragraph is more specific and limits the taxation of social security paid by a state is only taxable in the first state, even if the person resides in the other state.

For example, a person receiving a Swedish Pension is only taxed by Sweden, if they reside in the U.S.

Article 19, Paragraph 3 (Annuities)

“The term “annuities” as used in this Article means a stated sum paid periodically at stated times during life or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).”

This paragraph just clarifies the definition of annuities.

Article 19, Paragraph 4 (Contributions)

“a) In determining the taxable income of an individual who renders personal services and who is a resident of a Contracting State but not a national of that State, contributions paid by, or on behalf of, such individual to a pension or other retirement arrangement that is established and maintained and recognized for tax first-mentioned State as a contribution paid to a pension or other retirement arrangement that is established and maintained and recognized for tax purposes in that first-mentioned State, provided that:

(i) contributions were paid by, or on behalf of, such individual to such arrangement before he became a resident of the first-mentioned State; and

(ii) the competent authority of the first-mentioned State agrees that the pension or other retirement arrangement generally corresponds to a pension or other retirement arrangement recognized for tax purposes by that State.

b) A pension or other retirement arrangement is recognized for tax purposes in a State if the contributions to the arrangement would qualify for tax relief in that State.”

Generally, this would mean for example that if contributions were tax deductible in Sweden for a U.S. person (non-national) residing in Sweden, then the contributions would also be tax deductible on their U.S. tax return (similar to a 401K).

FBAR, FATCA, 3520 & 8621 Sweden Pension Reporting

There are many IRS International Information forms to consider when reporting the Sweden Pension to the IRS.

With the IRS taking an aggressive position on matters involving foreign accounts compliance and unreported offshore income — it is important to stay compliant with the Internal Revenue Service rules and requirements.

Since the US and Sweden have entered into several tax treaties such as the Double Tax Treaty, FATCA Agreement, and Totalization Agreement there are complex rules involving which country can tax the pension – usually based on residency and which Pillar is at play.

Since the Pillar 1 is social security equivalent, it is generally not reportable, as it is not an individualized funded accounts.

As to Pillars 2 and 3, here are some of the basics:

Sweden Pension Plan & FBAR

The FBAR Is used to report foreign bank and financial accounts, including life insurance, investment account, etc.

Generally, while Pillar 1 (Social Security) is not considered FBAR reportable — since it is equivalent to U.S. Social Security and not technically an account — the same cannot be said for other pillars.

Pillar 2 (Occupation) or Pillar 3 (Private) are reported on the FBAR since they are segregated accounts for each person who contributes, and the accounts have a separate identifier and value based on the contribution amounts.

FATCA Form 8938 & Sweden Pension Plan

The IRS Form 8938 (FATCA)  form is required for certain U.S. Taxpayers to report specified foreign financial assets.

The FATCA reporting (for U.S. Taxpayers) was introduced on the 2011 tax returns, and is technically referred to as the Foreign Account Tax Compliance Act.

Foreign Pension & Retirement is considered a foreign asset for FATCA purposes and therefore would be reportable on a Form 8938.

Generally, the same rules would apply as for the FBAR, insofar as Pillar 1 may escape reporting, but Pillars 2 and 3 are reportable.

Form 3520/3520-A & Sweden Pension Plan

Form 3520-A/3520 is used to report Foreign Trusts. At its most basic, a pension such as an Sweden Pension is foreign trust:

• Government Trustor (Pillar 1),
• Employer Trustor (Pillar 2)
• Investor/Employee (Pillar 3)

And, each trust has an Administrator, along with the employee beneficiary.

Thus, technically, the Sweden Pensions are a Trust.

Pillar 1: 3520-A

Pillar 1 is State mandated (State) which most resembles U.S. social security. It has no identifiable segregated balance, and the beneficiary (employee) is not the owner of the trust.

Presumably, the trust would not be reportable on Forms 3520/3520-A.

Pillar 2: 3520-A

There is no concrete ruling by the IRS on the reporting for the Sweden Pillar 2 and 3 pensions on the Form 3520-A. Generally, unless the employee has contributed more to the pension plan than the employer has, it is not reported on Forms 3520, since the beneficiary is not the owner of the trust during the years the beneficiary is employed and funding the pension.

In addition, it may qualify for a Revenue Procedure exception under Rev. Proc. 2020-17, depending on the person’s salary, age (determines percentage contributions), voluntary vs. mandatory, and employed vs. self-employed.

Pillar 3: 3520-A

Sweden Pension Pillar 3 is completely optional and voluntary.

Therefore, chances are this is a foreign trust which would be subject to Form 3520-A Reporting (Rev. Proc. 2020-17 may exempt reporting)

In addition, some clients will take the position that it is still a form of pension vs. pure investment, and therefore while it is in the growth phase, and deductions are not being taken, it is can escape reporting.

Form 8833

Form 8833 is used by Taxpayers who want to take a Treaty Position on issues involving the applicability of tax rules when it involves the pension (and other tax related matters).

Form 8621

Form 8621 is used to report PFIC (Passive Foreign Investment Companies). It also includes Foreign Mutual Funds. Generally, Pillar 1 is not reportable, but Pillars 2 and 3 would be. 

With PFIC, the main question will become whether the PFIC requirement (presuming the investments have funds in them), are reportable during the growth period (pre-distribution), or only once the pension becomes active/accessible.

That is a strategy issue each person should discuss with their counsel.

Unreported Sweden Pension

If you have not properly reported your Sweden Foreign Pension in the U.S. for tax, FBAR, FATCA, PFIC (8621) or other reporting, you may be out of compliance and possibly subject to fines and penalties.

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