US Tax of Swiss Pension Plan Income
Switzerland Pension & the U.S. Tax System: Switzerland has a multi-tiered pension system, which has three (3) tiers or “Pillars.” The Pillars refer to the World Bank pension framework. These different pillars or categories help categorize foreign pensions in different countries. Since pension income is considered “income,” and the U.S. taxes U.S. persons on their worldwide income, it is important to understand the interplay between Swiss Pension, the U.S. tax system and the IRS.
However, the U.S. and Switzerland do have a bilateral tax treaty and totalization agreement which can impact how the pension income is taxed.
Form 8833 may also provide an alternative route.
If You are seeking information for Swiss Pension Reporting, we have additional resources available for Swiss Pensions:
- FinCEN Form 114 Swiss Pension (FBAR)
- Form 8938 Swiss Pension (FATCA)
- Form 8621 Swiss Pension (PFIC)
- Form 3520/3520-A Foreign Trust
Swiss Pension System
The Swiss Pension System can be broken down into three (3) pillars:
- 1st Pillar: OASI
- 2nd Pillar: Occupational
- 3rd Pillar: Private
1st Pillar: OASI (Old Age and Survivor’s Insurance)
The first pillar refers to employment contributions and credits for certain caretaking activities. It is the responsibility of the Swiss Government.
As provided by the Swiss Government:
“The level of your OASI pension depends on several factors:
- the number of years you have contributed
- the level of your income
- any contribution credits you have received for bringing up children or caring for other persons.
Both employees and employers are required to pay contributions.
Employee contributions are deducted directly from your salary.
To receive the full pension, you have to have contributed in full. This means you and your employer have made payments without interruption from the time you were 20 until the time you reach retirement age.
The level of the pension you receive then depends on your average annual income.
By law, the maximum pension may not be more than twice the minimum pension.”
Is Swiss Pillar 1 Social Security?
Generally, Pillar 1 of the Swiss Pension System is comparable to U.S. Social Security. As it is a Pillar 1, state “pension” and distinct from a private pension, it is safe to compare it to the U.S. Social Security.
Swiss Totalization Agreement
There is a totalization agreement between the U.S. and Switzerland. The new agreement became effective on August 1, 2014.
If a U.S. person works in Switzerland for a Swiss employer, and meets the other basic requirements, then social security payments are made in accordance with Swiss rules.
The payments made into the 1st Pillar substitute for the requirement of the U.S. person to also make payment into the U.S. social security system during the time they meet the requirements under the totalization agreement.
Specifically (for U.S. persons working in Switzerland)
“Employed: If you work as an employee in Switzerland, you normally will pay only Swiss social security taxes, and neither you nor your employer will pay U.S. Social Security taxes.
Self-Employed: The agreement says if you are self-employed and live in the United States or Switzerland, the country where you live will generally cover and tax you.”
The employee does not deduct contributions to the Pillar 1 system on their U.S. tax return, since the equivalent under U.S. Tax law is not deductible – unless the employee is self-employed, in which the employer portion may be deductible.
Swiss & US Tax Treaty Analysis
While there is a tax treaty between Switzerland and the U.S., it would not create a new deduction that is otherwise not allowable in the U.S. For U.S. Tax purposes, the employee portion that is contributed to the Pillar 1 is equivalent to the portion of social security that the employee makes — which is not deductible for employed person.
Under the totalization agreement, most U.S. Persons working in Switzerland for a Swiss Employer will pay into the Swiss Pension/Social Security system and are not required to make any additional payment to the U.S.
1st Pillar Contributions
Since contributions to U.S. social security by employees is non-deductible, neither would be payments into the Swiss tax system (on a U.S. Tax Return).
*For a self-employed person, there may be a deduction available for employer portion and/or making an 8833 election (see below).
1st Pillar Distributions
As provided by Article 19 of the U.S. Swiss Tax Treaty, presuming that the 1st pillar is social security equivalent:
“Notwithstanding paragraph 2, social security payments and other public pensions paid by a Contracting State to an individual who is a resident of the other Contracting State may be taxed in that other State. However, such payments may also be taxed in the first Contracting State according to the laws of that State, but the tax so charged shall not exceed 15 percent of the gross amount of the payment.”
2nd Pillar: Occupational Pension
The 2nd Pillar is managed by the employer or by the self-employed, if applicable.
As provided by the Swiss Government:
“An occupational pension scheme is mandatory for all employees. It starts when you first get a job, from the age of 17.
However, you have to be earning at least CHF 21,330 a year. Both employees and their employers are required to pay contributions. These are deducted directly from your salary.
The level of the pension depends on the contributions you make throughout your working life. Each pension fund has its own rules.
All your contributions are combined to make up your retirement savings. The benefits can be paid as a pension or as a lump sum.
The pension is calculated using a conversion rate. The minimum rate is laid down by law. Currently it amounts to 6.8 per cent (for men and women who have reached the normal state retirement age).”
If you have accumulated retirement savings of CHF 400,000 during your working life and the conversion rate is 6.8%, your annuity will amount to CHF 27,200 a year, or CHF 2,267 a month.”
2nd Pillar is Similar to U.S. Pension
The 2nd Pillar is equivalent to a 401K Pension, although it is mandatory.
It is not social security, as it is in addition to the 1st Pillar, and benefits can be paid-out as a lump sum or annuity. In Switzerland, the pension it is mandatory, whereas the equivalent in the U.S. such as a 401K is not mandatory.
Are 2nd Pillar Contribution Payments Deductible?
This is up for debate but most of the time the answer would probably be, no.
Referring to Article 28, paragraph 4:
“In determining the taxable income for purposes of taxation in a Contracting State of an individual who renders personal services and who is a resident, 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 purposes in the other Contracting State shall be treated in the same way for tax purposes in the 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:
a) the individual was not a resident of that State, and was contributing to that pension or other retirement arrangement immediately before he began to exercise employment in that State; and
b) the competent authority of that State agrees that the pension or other retirement arrangement in the other Contracting State generally corresponds to a pension or other retirement arrangement recognized for tax purposes by that first-mentioned State.
The benefits of this paragraph shall extend for a period not exceeding five taxable years beginning with the individual’s first taxable year during which the individual rendered personal services in the first-mentioned Contracting State. For purposes of this paragraph, a pension or other retirement arrangement is recognized for tax purposes in a Contracting State if the contributions to, or earnings of, the arrangement would qualify for tax relief in that State.”
Breaking down the definition, if an Individual:
- Provides Personal Services in a contracting state (Switzerland); and
- Is a Resident but not a National of the contracting state; then the
- Contributions Paid on behalf of the individuals
- To a Pension that is
- Recognized for tax purposes the other state.
- Shall be treated the same
In Switzerland, the 2nd Pillar contributions are pre-tax and operates similar to a 401K, but based on the treaty language, it may be hard for a U.S. person to meet the all the elements and requires confirmation from a competent authority in Switzerland.
The General guidelines are that contributions are usually taxable.
As to growth, depending on the reading of the treaty, the growth may or may not be taxable.
With distributions, they are generally taxed in the country of residence at the time of the distribution.
3rd Pillar: Private Pension
Pillar 3 are self-funded and designed to further supplement the Pillar 1 and 2 and contributions are not deductible from gross income, but some clients may take different positions as to growth and distributions — depending on their interpretation of the treaty.
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