# Defined contribution Pension and FBAR amendments



## Cousin Jack

Hi

Wife reports annual FBAR but only know realised an error, she has omitted her employer group defined contribution pension scheme on last 2 years (2017 and 2018).She did not realise she was enrolled in the scheme! Up to date now with 2019 reporting.
Minimal value, about $1k.
Should she amend past two year FBAR's and add this account? 
She is worried she could be penalised, and if so to what extent?

Thanks


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## Bevdeforges

Honestly, I wouldn't bother amending the prior years. They really don't seem to check these things year against year unless there is something egregious on her tax return that might possibly relate to "foreign accounts" like this.

Does she even know for a fact that her employer (or the financial company holding the pension account) is reporting her account as being held by a "US person?" Have they ever asked her for a W-9?

Control of the whole FBAR process is pretty well non-existent. If they have questions, they'll ask (but rarely do).


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## Cousin Jack

Bevdeforges said:


> Honestly, I wouldn't bother amending the prior years. They really don't seem to check these things year against year unless there is something egregious on her tax return that might possibly relate to "foreign accounts" like this.
> 
> Does she even know for a fact that her employer (or the financial company holding the pension account) is reporting her account as being held by a "US person?" Have they ever asked her for a W-9?
> 
> Control of the whole FBAR process is pretty well non-existent. If they have questions, they'll ask (but rarely do).



Ok, thanks. How is she meant to report the employer contributions to the plan on her 1040, does she just add it to her earned foreign income? Anything else?


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## Moulard

As Bev says, chances of being penalised are next to zero if there was no Form 8938 reporting requirement and only negligibly higher if there was. They only seem interested in this for those who are actually resident in the US and only when significant sums are involved.

If it would help her sleep it is possible to file an amended Fincen Form 114 for those two years. If there was Form 8938 reporting, then you could file a 1040-x with an amended 8938 attached. 



> Ok, thanks. How is she meant to report the employer contributions to the plan on her 1040, does she just add it to her earned foreign income? Anything else?


If it is an employer plan then I would report contributions per s.402(b). 

Contributions are reported as income in the year when they vest. The growth portion is then taxed on distribution.

If it is only an employer's promise to pay then there is unlikely to have been constructive receipt in which case it would only be taxed on distribution.

There is no specific line item for it simply report the employer contributions wages on line 1, or if you wanted to split it out, you could report it on Schedule 1 line 8 and 1040 line 7a 

Its worth noting that employer contributions to these sorts of schemes are NOT considered earned income (even if they are tied directly to wages) for the purposes of the Foreign Earned Income Exclusion.

If the contribution cannot be zeroed out by the standard deduction then you may want to look at foreign tax credits. You may well find that the higher tax rate in the UK is enough on the wages to offset any tax preferential treatment on the pension contributions.


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## Jca1

Since you're in the UK, article 18(5)(a) of the US-UK tax treaty may excuse you from reporting the contributions as income.



> 5 (a) Where a citizen of the United States who is a resident of the United
> Kingdom exercises an employment in the United Kingdom the income from
> which is taxable in the United Kingdom and is borne by an employer who is a
> resident of the United Kingdom or by a permanent establishment situated in
> the United Kingdom, and the individual is a member or beneficiary of, or
> participant in, a pension scheme established in the United Kingdom,
> 
> (i) contributions paid by or on behalf of that individual to the
> pension scheme during the period that he exercises the employment in
> the United Kingdom, and that are attributable to the employment, shall
> be deductible (or excludable) in computing his taxable income in the
> United States; and
> 
> (ii) any benefits accrued under the pension scheme, or
> contributions made to the pension scheme by or on behalf of the
> individual’s employer, during that period, and that are attributable to
> the employment, shall not be treated as part of the employee’s taxable
> income in computing his taxable income in the United States.
> This paragraph shall apply only to the extent that the contributions or benefits
> qualify for tax relief in the United Kingdom.
> 
> (b) The reliefs available under this paragraph shall not exceed the
> reliefs that would be allowed by the United States to its residents for
> contributions to, or benefits accrued under, a generally corresponding pension
> scheme established in the United States.
> 
> (c) For purposes of determining an individual’s eligibility to
> participate in and receive tax benefits with respect to a pension scheme
> established in the United States, contributions made to, or benefits accrued
> under, a pension scheme established in the United Kingdom shall be treated as
> contributions or benefits under a generally corresponding pension scheme
> established in the United States to the extent reliefs are available to the
> individual under this paragraph.
> 
> (d) This paragraph shall not apply unless the competent authority of
> the United States has agreed that the pension scheme generally corresponds to
> a pension scheme established in the United States


It is complicated, however. The technical notes for the treaty go into detail about which plans "generally correspond" to each other and state that the above provisions apply only to "employer plans." UK pension law has been reorganized since the treaty was written and it's not 100% clear which parts of the treaty apply to what plans anymore, though the technical explanation says that "pension schemes" are defined by the treaty in such a way that they "also include any scheme identical or substantially similar to the foregoing schemes that are established pursuant to legislation introduced after the date of signature of the Convention."

The savings clause originally didn't protect 18(5), but the treaty was amended to clarify that it does.

There's probably no one correct way to report these contributions for US purposes.

About the FBAR issue, I'd probably leave it alone. If you do amend FBARs, look up the "delinquent FBAR procedures" to see the official IRS way of doing this without penalties.


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## Cousin Jack

Jca1 said:


> Since you're in the UK, article 18(5)(a) of the US-UK tax treaty may excuse you from reporting the contributions as income.
> 
> 
> 
> It is complicated, however. The technical notes for the treaty go into detail about which plans "generally correspond" to each other and state that the above provisions apply only to "employer plans." UK pension law has been reorganized since the treaty was written and it's not 100% clear which parts of the treaty apply to what plans anymore, though the technical explanation says that "pension schemes" are defined by the treaty in such a way that they "also include any scheme identical or substantially similar to the foregoing schemes that are established pursuant to legislation introduced after the date of signature of the Convention."
> 
> The savings clause originally didn't protect 18(5), but the treaty was amended to clarify that it does.
> 
> There's probably no one correct way to report these contributions for US purposes.
> 
> About the FBAR issue, I'd probably leave it alone. If you do amend FBARs, look up the "delinquent FBAR procedures" to see the official IRS way of doing this without penalties.


Thanks everyone. She was automaticaly enrolled in a workplace pension and pays 5%, employer pays 3% contributions, has had the plan since 2017. Its a mutual fund.
Value is <£1000. Just learning about 3520, should she have been completing this as well?
Looks very complicated and not sure we could do it by ourselves without a CPA, the costs just for the CPA would exceed the fund value!


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## Cousin Jack

Cousin Jack said:


> Thanks


Wifes most recent statement shows that she contributed 48% to the plan and the remaining 52% was a combination of employer and tax relief contributions so could be argued this as a “non-grantor” trust so no 3520 obligations.


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## Jca1

Some firms will tell you to still file 3520 (but not 3520-A) if you have a plan that qualifies as an employees' trust instead of a grantor trust, but personally I would be reluctant to do it due to the expense and risk of penalties if there is a mistake on the form. 

Additionally, there is a PLR where the IRS ruled that what was very likely a UK employer retirement plan qualifies as a 402(b) plan. The form 3520 instructions say not to file the form for 402(b) plans.


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## Cousin Jack

Cousin Jack said:


> Thanks everyone. She was automaticaly enrolled in a workplace pension and pays 5%, employer pays 3% contributions, has had the plan since 2017. Its a mutual fund.
> Value is <£1000. Just learning about 3520, should she have been completing this as well?
> Looks very complicated and not sure we could do it by ourselves without a CPA, the costs just for the CPA would exceed the fund value!


Funds show its a PFIC and because its under $25k value there is no annual report to file unless its cashed out. Will need a CPA to file the complicated 8621 form when that time comes!


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## Jca1

What I've heard is you normally have to file PFIC paperwork for any year where you had a transaction with a PFIC, even if you're under the $25k exemption.

However, there is an exception to PFIC reporting for pensions covered by a tax treaty that defers taxation of pension income until it is distributed. The US-UK treaty meets that requirement.

https://www.law.cornell.edu/cfr/text/26/1.1298-1

1.1298-1(c)(4)



> (4) Exception for PFIC stock held through certain foreign pension funds. A shareholder who is a member or beneficiary of, or participant in, a plan, trust, scheme, or other arrangement that is treated as a foreign pension fund (or equivalent) under an income tax treaty to which the United States is a party and that owns, directly or indirectly, an interest in a PFIC is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to the PFIC interest if, pursuant to the applicable income tax treaty, the income earned by the foreign pension fund may be taxed as the income of the shareholder only when and to the extent the income is paid to, or for the benefit of, the shareholder.


Isn't figuring all this out for an ordinary pension with automatic enrollment fun?


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## Cousin Jack

Jca1 said:


> Isn't figuring all this out for an ordinary pension with automatic enrollment fun?


One fund is worth just £150. Its value will be wiped out in the first hour paying the CPA let alone any taxes and god forbid any penalties! Both fund values will be wiped out even before she gets to file her taxes!


Warning....Automatic enrolment to even the smallest workplace fund and not complying with IRS reporting requirements could potentialy force the beneficiary into bankruptcy! Unfortunately, the average person is unaware of the reporting requirements until its too late!


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## Nononymous

Cousin Jack said:


> One fund is worth just £150. Its value will be wiped out in the first hour paying the CPA let alone any taxes and god forbid any penalties! Both fund values will be wiped out even before she gets to file her taxes!
> 
> Warning....Automatic enrolment to even the smallest workplace fund and not complying with IRS reporting requirements could potentialy force the beneficiary into bankruptcy! Unfortunately, the average person is unaware of the reporting requirements until its too late!


It's probably at this point that one should begin looking at non-compliance, and arranging one's affairs accordingly. With no US assets or income sources and a second citizenship, one is essentially untouchable. The IRS has no ability to penalize.


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## Cousin Jack

Nononymous said:


> It's probably at this point that one should begin looking at non-compliance, and arranging one's affairs accordingly. With no US assets or income sources and a second citizenship, one is essentially untouchable. The IRS has no ability to penalize.



My wife has US assets, business and family she visits often, no second citizenship (yet).


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## Jca1

Cousin Jack said:


> One fund is worth just £150. Its value will be wiped out in the first hour paying the CPA let alone any taxes and god forbid any penalties! Both fund values will be wiped out even before she gets to file her taxes!
> 
> 
> Warning....Automatic enrolment to even the smallest workplace fund and not complying with IRS reporting requirements could potentialy force the beneficiary into bankruptcy! Unfortunately, the average person is unaware of the reporting requirements until its too late!


I agree, it's a ridiculous situation. 

Just to be clear though - per regulations, no PFIC reporting is required for this type of account.


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## Cousin Jack

Jca1 said:


> I agree, it's a ridiculous situation.
> 
> Just to be clear though - per regulations, no PFIC reporting is required for this type of account.


Doesnt it need to be reported on a 8261 when she withdraws the funds and closes the account ?


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## Jca1

Cousin Jack said:


> Doesnt it need to be reported on a 8261 when she withdraws the funds and closes the account ?


I don't think so. The regulation seems to say no.


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