Simplified Reporting for “Foreign” Retirement Plans?

As has been widely reported, the IRS has tried to simplify the compliance burden of US taxpayers with non-US retirement plans through Revenue Procedure 20-17. John Richardson’s post on the CitizenshipSolutions blog provides a comprehensive explanation of this revenue procedure.

The Revenue Procedure provides taxpayers with a safe harbour from trust reporting on Form 3520. For plans that meet the requirements, it is no longer necessary to determine whether the plan actually constitutes a trust under US tax rules (see Reg §301.7701-4) because trust status will not change the US tax compliance required. For plans that don’t meet the requirements, nothing has changed – if the plan does not meet the definition of “trust” in the regulations, then form 3520 is not required.

I am concerned that the restrictions placed by Rev Proc 20-17 on what constitutes a “Tax-Favored Foreign Retirement Trust” are too restrictive to be of much use. To qualify, the foreign retirement plan must:

• Be exempt from tax or otherwise tax-favored in the country where it is organised. (Rev Proc 20-17 Section 5.03(1)).
• Provide (either directly or via the plan participants) annual information reporting to the relevant tax authority. (Rev Proc 20-17 Section 5.03(2))
• Permit only contributions with respect to earned (personal service) income. (Rev Proc 20-17 Section 5.03(3))
• Have contributions limited by either a percentage of earned income, by US$50,000 per year, or by US$1,000,000 over the lifetime of the plan participant. (Rev Proc 20-17 Section 5.03(4))
• Allow withdrawals only upon reaching a specified age, or on death or disability – or early withdrawal penalties must apply. Withdrawals for certain limited purposes (e.g. education, hardship, home purchase) are allowable. (Rev Proc 20-17 Section 5.03(5))

With regard to Australian superannuation accounts – Australian law allows non-deductible contributions of up to A$100,000 per year that are not conditioned on having earned income (as long as the participant is below age 65). While the vast majority of superannuation members do not make any contributions in excess of the government mandated 9.5% contribution by employers, the ability to make these extra contributions means that a superannuation account will not qualify for the safe harbour provided by Rev Proc 20-17.

Essentially, the IRS is saying that any retirement plan that is similar enough to US retirement plans will qualify as “Tax-Favored.” But, the limits given are actually LOWER than the contribution limits for similar US plans (the limitation for defined contribution plans under §415(c)(1)(A) is $57,000 in 2020). Each country designs its retirement savings rules based on what works best in their own culture, economy and tax system. It is ironic that the US does not recognise Superannuation as a “Tax-Favored Retirement Plan” because the contribution limits are too generous, and Australia does not recognise US retirement plans as “Foreign Superannuation” because the withdrawal provisions are too generous.

So, how many countries have retirement plans that will benefit from Rev Proc 20-17? If you have a foreign retirement account, you can help collate this information by responding to an anonymous informal survey. And please share your stories either in the comments below, or over at CitizenshipSolutions.