U.S. citizens that live and work outside the U.S. often participate in foreign retirement plans. Similarly, non-U.S. citizens that move to the U.S. and become U.S. tax residents, after working outside the U.S., have often participated in foreign retirement plans.
A question that sometimes arises is whether the income accruing annually in the foreign retirement plans must be included on the individual's U.S. tax return. The rule for this situation was concisely stated in Rev. Proc 2002-23:
Under the domestic law of the United States, an individual who is a citizen or resident of the United States and a beneficiary of a [foreign] retirement plan will be subject to current United States income taxation on income accrued in the [foreign retirement] plan even though the income is not currently distributed to the beneficiary, unless the plan is an employees’ trust within the meaning of section 402(b) of the Internal Revenue Code and the individual is not a highly compensated employee subject to the rule of section 402(b)(4)(A).
Thus, as long as the foreign retirement plan is an employees’ trust and the individual is not a highly compensated employee, then no inclusion is required. On the other hand, if the foreign retirement plan is not an employees’ trust or if the individual is a highly compensated employee (and the plan is discriminatory as provided in section 402(b)(4)(A)), then the annual increase in value of the foreign retirement plan is required to be included on the U.S. individual’s U.S. tax return.
There are often special rules in U.S. tax treaties that modify the taxation of pensions or retirement plans. Consequently, the applicable treaty should always be reviewed to determine whether U.S. domestic law is overridden by treaty.
Forms 3520 and 3520-A are generally not required to be filed by a U.S. individual who is the beneficiary of a foreign retirement that is an employees’ trust. However, U.S. individuals who are beneficiaries of other types of foreign retirement plans that are characterized as trusts for U.S. tax purposes may need to file Forms 3520 and 3520-A.
In addition, it is important to note that an FBAR and a Form 8938 may be required with respect to an interest in a foreign retirement plan.