theOAP

@kodokan

I'm enjoying this discussion, so can I ask a question?

You are maintaining the instructions for FBAR, by implication, are indicating that a UK defined contribution pension is a 'qualified' pension. Inherent to completing US tax and information forms is consistency in treating all income as the same type of income, no matter which form is used.

My question:
If an individual, prior to coming to the US, has contributed to a UK defined contribution pension; they wish to maintain that pension until retirement; at retirement they declare the distributions from that pension on 1040, line 16a; and they wish to claim a reduction in the distributions due to the contributions they made to that pension to arrive at a figure for 16b; which would you recommend they use to claim the reduction, the 'simplified method' (for qualified pensions) or the 'general rule' (for non-qualifying pensions)?

kodokan

Me too, I think it's good to rehash this in the light of new and possibly relevant information. That, and I love nerdy money things like this - between forum posts, I'm currently updating my early retirement planning lifetime income/ expenditure spreadsheet .

Absolutely no idea on your question off the top of my head, sorry. I'm decades off being able to touch the money, so haven't done any research yet on how I might report it when I do. I've vaguely registered things about using line 16a and the lump sum not being tax free, but that's as far as I'd got.

But hey, let's all try... By 'maintain that pension until retirement', do you mean in your scenario that the person continued to pay contributions in once they became a US taxpayer, and presumably made those payments out of post-taxed income? Is that why this person is attempting to have the contributions excluded, otherwise it'd be like taxing money that someone was merely taking out of their bank account? Sort of like working out the cost basis for selling shares, in order to calculate capital gains?

theOAP

Quick reply: yes, it would be a requirement that a portion of the contributions made were declared as income on a US tax form otherwise the whole amount of the distribution would be taxable. Well spotted, but the meat of the question still stands: when calculating contributions made to a foreign pension plan (a US Person resident in the UK paying into a UK plan, for example), is it a qualified plan or not for 1040?

durham_lad

I maintained 2 UK DB pension schemes into which I had made contributions so when I started receiving monthly payments I declared the payments as fully taxable since my contributions had been before tax. However, theOAP pointed out that it should have been possible to claim a basis on my US tax returns, but the pensions are small and I'm not motivated enough to try and change the situation, particularly since the companies I am getting the pensions from no longer exist.

However, with a DC plan I should imagine that one has good records of the contributions.

kodokan

Briefly, as I never heard of any of these things until 15 mins ago, and need to do the school pick up shortly...

Had a quick scout of some relevant IRS docs about general and simplified methods, Publication 575, etc. The way that they define the word 'pension' could be taken to apply to a workplace DC plan - lots of stuff about it being an employer plan only open to employees, employer puts money in tax free as part of overall compensation, etc etc.

But I don't think you could argue the same for a UK private pension, especially now that they've removed any need to take an annuity. I'm not sure that such plans within the new UK system would be recognized as what the US thinks of as a pension, which seems to be all about the annuity. UK personal pensions are much more like IRAs, I guess.

And in that case, your question is... tricky? Irrelevant..? Dunno... A UK person living in the US couldn't be paying into a UK company pension scheme anyway, could they? (Unless they were here short term, and wouldn't be here at the point of withdrawal anyway.) And a US person working in the UK would be paying in on the same basis as a regular UK person, tax free. Unless they somehow then get stiffed by the dual filing, and have to still pay US tax on those contributions regardless; not an area I know about.

All very interesting, anyway. It'll be fun to see what, if anything, the changes in the UK legal framework of what exactly a UK pension is now, has a knock on to here.

Right, dashing out the door!

theOAP

Don't try to over-analyse this , otherwise we'll get into all those long and boring discussions on treaties, etc.. It's not a trick question, but it could be, depending on your reading, relevant.

If you call the IRS, say you have a foreign pension plan, and ask for the purpose of 1040, line 16 whether you should use the simplified method or the General Rule, my guess is they will say General Rule. The regulations for completing a 1040 are fairly specific as to the determination of a qualified pension. Certainly the general consensus is a foreign pension plan does not meet those requirements unless it has been specifically designed and registered to adhere to the Code guide lines of a qualifying pension. That's certainly what was said when I confirmed the situation with the IRS.

Which brings us back to the question, and as I say, it all depends on your reading and whether or not it really matters. If you interpret that the pension does not need to be included on an FBAR because the instructions say a qualified pension does not need to be included, then is it necessary to always claim it's a qualified pension, even when declaring the distributions on a 1040, for the sake of consistency in reporting.

In other words, is it OK to say it's a qualified pension for FBAR purposes but say the income generated is non-qualifying on a future 1040?

My only point would be a hesitancy to pin the readings of the FBAR instructions as the primary reason not to include the pension on an FBAR. I don't think using the instructions as you interpret them is correct on this sole issue.

But, that's only one of your reasons for not reporting it. I'm only suggesting you should rely on your other reasons if you wish not to report it.

As regards 8938, as discussed in previous posts, I would offer the following: 8938 is not a form used to calculate tax. It's a form on which the IRS has the audacity to require you to list all your foreign assets. Whether a foreign pension value is $0 or $1 million isn't the issue for 8938. What the IRS want to know is are you declaring any taxable income on a 1040 as a result of any foreign assets (and where), or will you one year in the future be required to declare income on a 1040 as a result of your current foreign assets (which, I assume, will be recorded). The other use, of course, is the proof that you (perhaps wilfully) attempted to evade tax by not declaring a foreign asset which would create taxable income.

Again, I would suggest you not make your decision based on your reading of the 'new' FBAR instructions as they relate to a qualified pension, but on other reasons if you feel reporting is not required.

kodokan

Very interesting perspective on consistency across the forms and process, OAP (although I expect you're being far more thorough and consistent than the IRS; I'm almost tempted to call and ask them to go on, give me examples of foreign retirement accounts that actually do comply with 401, 403, etc).

Well, we didn't include them for 2012, as explicitly instructed by our tax prep people, but they were listed on the 8938 we did, so it's clear we weren't trying to hide them but were just following instructions. If we get called on that one, it's the Big Four's problem to argue their case for us.

I've self-filed for 2013 and will do the same for 2014; I have to do FBARs for 2013 and 2014 anyway as the cash accounts alone hit the threshold, so I think I might throw in the 3 DC accounts, with $0/ don't know for the balances.

Going forward, the cash accounts won't trigger the $10k filing requirement, and as per 8938, I can arguably use $0 as the value for the pension funds...so no requirement to file .

That might be the way forward. Clearly not trying to hide their existence for future tax purposes, but plausibly just confused about the inconsistent reporting rules. Hopefully the whole thing will be cleared up before I have to worry about 2015. I'm still hoping the FBAR falls by the wayside in favor of 8938 - we're light years off those thresholds!

kodokan

It's also a technicality that I have signatory authority over the DC plans, to move or withdraw the assets (again, it's that 'you're hiding assets' concern).

Because I really I don't. I can't withdraw any money for years. And I can't move the money to another account at another provider, because no UK pension company will open an account for a non-UK resident - we tried when we were in Switzerland, as one of hubby's zombie pensions has high charges.

So my supposed 'authority' and ability to control the assets counts for zip.

HartleyHare

Cripes - What about airmiles?

Seriously, this is a very informative discussion. We also have several pensions similar to Kodokan. Our CPA hasn't yet advised how these will be treated so will be interesting to see which stance he takes.

mandpete

So a couple of months ago I received a letter from HSBC via HMRC informing me I have an old account with them and they needed my current address and signature. Today I received another letter from HSBC informing me my signature was not the one on file. I called HSBC and to cut a very long story short I opted out of SERPS back in 1989 and even though I only made one contribution I have the grand sum of £5500 in a pension account. We have been filing FBAR for the past four or five years and our 2013 FBAR has already been filed. Can I just forget about it for this year and then include it on 2014 form with a note explaining I was totally unaware of this account.

nun

As all my UK NICs have been made with after tax dollars I'm going to calculate the US tax free basis on my UK state pension when I get it.

Nightwatch77

Hello, I'm new here and I've been reading this with real interest. I'm trying to wrap my head around all these things as I'm far from an expert, but the discussion here seems sensible, rational and balanced (imagine that for a forum!)

Anyway, I wanted to see what others thought of this (and to see if it's inline with the thinking here, because getting an "official" position from the powers that be seems tricky)

My wife is American and lives in the UK. She had a DC plan, a Group Personal Pension Plan, for just under 3 years that her employer invited her to join. It's run by a financial institute (not the employer) but the employer contributed to it each month she did. I believe it's now rolled over into some kind of personal pension, as she isn't employed there, but we need to check. The amount in the pot is around $7k, so not a huge sum.

She didn't report this on FBAR as, like some, she just didn't know she should have. It should have gone on 2011 and 2012's FBARS, which she did file as other accounts pushed her over the threshold, and on 2013's FBAR she'll declare it and do that correctly going forward.

We spoke to one of the well-known US expat tax firms when we found out that it should have been reported and asked them about future reporting. Basically, FBAR = yes, anywhere else = no. I told them specifically it was a Group Personal Pension Plan and they said it falls under the treaty and that the contributions by my wife and her employer do not need to be reported anywhere but the FBAR. When she retires and takes out a lump sum or draws down, that income will need to be declared though as there will be tax implications then. We asked them about filing 8833 and they said there was no need to do that, and I have this all in writing. This seems to fall in line with something I saw on another forum which nun contributes to where someone went to the IRS at the embassy and was given the same answer.

I know all of this pension stuff is murky and no-one (even professionals) know 100%, but does that sound like reasonable advice we've been given?

nun

Sounds reasonable.....It's interesting that there are now several reports of professional opinions that say the 8833 is not required. Obviously they accept the implicit nature of the tax treaty rather that the need to explicitly claim it's benefits for pensions.

durham_lad

If she adds this new account on her next FBAR filing I'll bet it won't raise a flag with the powers that be. It is only an account worth $7k and if she has been doing FBARs anyway it must be fairly common for new accounts to be added and removed from year to year.

Nightwatch77

Nun - cheers
durham_lad - I agree. It's such a small amount and there was zero intention of being dishonest.

So, correct me if I'm wrong, it seems that most or all types of UK pensions are covered by the treaty and while most will be FBAR reportable there are two routes to take:

1. Put it on the FBAR. That's it. No contributions/gains mentioned anywhere else. When it comes to retirement some tax will be due.

2. Establish a basis in the pension, which, from what my simple mind understands, means mentioning contributions and gains and using foreign tax credits to cover them. While more complex it means that the amount to be taxed in the future is smaller.

Honestly, I can't tell you how refreshing it is to see an easy-to-follow debate on this topic. Still, I guess we'll all know concrete answers if and when the IRS says something. It does seem, from what others suggest here, that they don't seek to punish expats with 'regular' pensions and income, despite the way people make FATCA sound like a death sentence to anyone living overseas.