Foreign Retirement Accounts and Form 3520: When U.S. Persons Must Report

1. Key points

• A foreign pension or retirement account is often a foreign trust for U.S. tax purposes. If so, contributions, ownership and distributions are reportable under IRC § 6048 on Form 3520, and an owned plan needs a Form 3520-A, unless an exception applies.
• There are four sources of exceptions:
  • the statute itself, for transfers to compensatory trusts (§ 6048(a)(3)(B)(ii));
  • Notice 97-34, for distributions from those trusts;
  • two revenue procedures: Rev. Proc. 2014-55 for Canadian retirement plans, and Rev. Proc. 2020-17 for tax-favored retirement and savings trusts in any country;
  • the 2024 proposed regulations, which taxpayers may rely on under conditions.
• Most exemptions are conditional. Rev. Proc. 2020-17 requires an “eligible individual” who has filed income tax returns and reported the plan’s income where U.S. law requires it, and a plan that meets every condition of section 5.03 or 5.04.
• A tax treaty’s pension article generally governs income tax (for example, deferral of tax on undistributed earnings). By itself, it does not remove section 6048 information reporting. Canada is the exception, because Rev. Proc. 2014-55 adds a reporting exemption.
• Every exemption discussed here leaves Form 8938 and the FBAR in place. A plan holding foreign funds may also raise Form 8621 (PFIC) questions.
• Section 6677 penalties already assessed for an exempt plan can be abated or refunded on Form 843 under Rev. Proc. 2020-17, section 6.

2. Why a foreign retirement plan can require Form 3520

Section 6048 requires three kinds of reporting by U.S. persons with respect to foreign trusts:

The penalties are severe. Under § 6677(a), a late, incomplete or incorrect Form 3520 carries a penalty of the greater of $10,000 or 35% of the gross reportable amount: the value transferred, or the gross distributions. For a missing Form 3520-A, § 6677(b) substitutes 5% of the gross value of the portion of the trust treated as owned by the U.S. person. Additional $10,000 penalties accrue for each 30 days the failure continues more than 90 days after an IRS notice.

Individually funded plans are where this most often arises. Rev. Proc. 2014-55, section 2.01 explains, for Canadian plans, that under domestic U.S. law a U.S. beneficiary is currently taxable on income accrued in the plan unless the plan is a section 402(b) employees’ trust. The same reasoning reaches plans in other countries, and it is why owner reporting (§ 6048(b)) frequently applies.

3. The step-by-step test

Work through each step for each plan. A plan that leaves the test early is not reported on Form 3520, but the reporting in section 10 still applies.

4. Rev. Proc. 2020-17 conditions, line by line

Issued under the § 6048(d)(4) authority to suspend reporting where the United States has no significant tax interest, Rev. Proc. 2020-17 exempts eligible individuals’ transactions with, and ownership of, applicable tax-favored foreign trusts. It applies to all prior open years (section 7). Each condition is established by the laws of the trust’s jurisdiction.

Eligible individual (section 5.02)

An individual who is, or was, a U.S. citizen or resident and who, for every period still open for assessment under § 6501 (disregarding § 6501(c)(8)), is compliant or comes into compliance with all income tax return filing requirements, and has reported as income any contributions to, earnings of, or distributions from the trust to the extent U.S. law requires, including on an amended return.

Tax-favored foreign retirement trust (section 5.03)

The trust must operate exclusively or almost exclusively to provide, or earn income for, pension or retirement benefits (and ancillary or incidental benefits), and meet all of the following:

A rollover from another qualifying trust in the same jurisdiction doesn’t disqualify the receiving trust.

Tax-favored foreign non-retirement savings trust (section 5.04)

A trust operating exclusively or almost exclusively for medical, disability or educational benefits that meets conditions (1) and (2) above, has contributions limited to $10,000 or less annually or $200,000 or less over a lifetime, and conditions withdrawals on those purposes (or penalizes other withdrawals). Section 5.04 has no earned-income condition.

5. The 2024 proposed regulations compared

The proposed regulations (REG-124850-08, 89 FR 39440, May 8, 2024) would codify and expand the Rev. Proc. 2020-17 exemptions in proposed § 1.6048-5(b). The preamble says the changes respond to comments asking for higher contribution limits, limited unearned-income contributions, and relief for small trusts outside the listed categories.

Drafting note: the preamble describes proposed § 1.6048-5(b) as an exception for retirement, non-retirement savings and de minimis savings trusts, but the operative sentence in paragraph (b)(1) names only paragraphs (b)(2) and (b)(3). If a client relies on the de minimis category, document the reliance on the preamble and watch for the final text.

Reliance is all-or-nothing. The proposed regulations also change other foreign trust rules, for example on loans from and use of property of foreign trusts and on foreign gifts. Before relying on the more generous pension rules, confirm the client and related persons can apply the entire package consistently.

6. What tax treaties do and don’t change

Treaty pension articles typically do three things:

• allocate taxing rights over pension payments;
• defer the residence country’s tax on a foreign plan’s undistributed income;
• allow deductions for cross-border contributions in defined cases.

Read three parts of each treaty together:

1. The definition of pension scheme or pension fund. It often requires the plan to be generally tax-exempt locally and operated principally for retirement benefits, and some treaties list qualifying plans in notes.
2. The savings clause, which preserves U.S. taxation of citizens and residents “as if the Convention had not come into effect”.
3. The exceptions to the savings clause. Only the pension provisions listed there help a U.S. citizen.

Information reporting is a separate question. Income tax deferral under a treaty doesn’t answer whether the plan is a foreign trust reportable under § 6048. Apart from Canada, where Rev. Proc. 2014-55 exempts reporting, the reporting exemptions come from Rev. Proc. 2020-17 and the proposed regulations, not from the treaty. Treaty texts and Treasury Technical Explanations are on the IRS United States Income Tax Treaties – A to Z ↗ page.

Treaty-based return positions are generally disclosed on Form 8833 under § 6114. Check the Form 8833 instructions for the exceptions from disclosure that may apply to pension items.

7. Canada

The treaty

Article XVIII(7) of the U.S.–Canada treaty, as replaced by Article 13 of the 2007 Protocol, lets a citizen or resident of one country who is a beneficiary of a plan resident in the other country elect to defer tax on income accrued in the plan until it is distributed. The plan must be generally exempt there and operated exclusively to provide pension or employee benefits. Article XVIII appears in the savings-clause exceptions of Article XXIX(3)(a), so U.S. citizens can use it. The 2007 Protocol also added Article XVIII(8)–(17), which allow deductions for cross-border contributions in defined employment situations (see the Technical Explanation).

Rev. Proc. 2014-55

• Automatic election (section 4.02). An “eligible individual” is treated as having made the Article XVIII(7) election from the first year it was available. That is someone who filed required U.S. returns, did not report the plan’s undistributed earnings, and reported distributions consistently with the election. No Form 8891 or statement is needed. Individuals who reported the accrued income currently are not eligible and need the Commissioner’s consent to elect (section 4.04).
• Reporting exemption (section 5.01). Beneficiaries, whether eligible individuals or not, and annuitants don’t report contributions, distributions or ownership under § 6048, and custodians don’t file Form 3520-A. Form 8891 is obsolete. Form 8938 and FBAR obligations are unaffected.
• Distributions (section 6) are taxed under § 72, subject to the treaty.
• It supersedes Rev. Proc. 2002-23 and Notice 2003-75, which remain useful for earlier years.

Which Canadian plans

8. United Kingdom

Pension scheme definition

Article 3(1)(o) of the U.S.–U.K. treaty defines a pension scheme as an arrangement that is generally exempt from income tax in its country and operated principally to administer or provide pension or retirement benefits. The exchange of notes confirms two groups: UK employment-related approved retirement benefit schemes (other than social security) and approved personal pension schemes, plus substantially similar schemes established under later legislation; and, on the U.S. side, 401(a) plans, IRAs (including SEP, SIMPLE and Roth IRAs), 403(a) and 403(b) plans. The notes treat the listed schemes of each country as generally corresponding to each other.

What the pension articles do

• Article 18(1) defers the residence country’s tax on a scheme’s income for a resident of one country who participates in a scheme established in the other, until it is paid out (and not transferred to another scheme). Article 1(5)(a) lists it as an exception to the savings clause, so it applies to U.S. citizens resident in the United States who participate in a UK scheme.
• Article 17(1)(b) exempts, in the residence country, the part of a pension from the other country that would be exempt there for a resident. It is also excepted from the savings clause. Article 17(2) gives a lump sum from a scheme only to the country where the scheme is established.
• Article 18(5) is the rule for U.S. citizens living in the UK. It covers contributions to a UK scheme, and benefits accrued, during UK employment borne by a UK employer, limited to the relief for a generally corresponding U.S. plan and subject to the U.S. competent authority’s agreement (paragraph 5(d)). The Technical Explanation walks through paragraphs 1–5. Article 18(1) by its terms addresses a scheme in the other country, so it doesn’t give a UK resident deferral for a UK scheme.

Reporting

No UK equivalent of Rev. Proc. 2014-55 exists, so the treaty’s income tax relief doesn’t settle whether Form 3520 or 3520-A is due. Apply steps 1–5:

• Employer-funded occupational schemes often raise the § 402(b) compensatory trust analysis (step 2).
• Personal pensions, including self-invested personal pensions, must be tested against Rev. Proc. 2020-17, section 5.03, especially conditions (3) and (4), or the proposed regulations.
• An ISA is a savings account, not a pension scheme. Apply step 1, then the de minimis category if it is a trust.

9. Malta

The U.S.–Malta treaty defines “pension fund” (Article 3(1)(k)) as, for Malta, a licensed fund or scheme taxed only on income from Maltese immovable property and operated principally for pension or retirement benefits. Article 17(1)(b) exempts in the residence country amounts that would be exempt in the source country, and Article 18 defers tax on a pension fund’s income until distribution.

In a competent authority arrangement (Announcement 2021-19, 2021-52 I.R.B. 912), the two countries confirmed that a fund, scheme or arrangement is not a pension fund if, apart from qualified rollovers, it either:

• accepts contributions in a form other than cash, or
• does not limit contributions by reference to earned income from personal services.

That expressly includes personal retirement schemes under Malta’s Retirement Pensions Act of 2011. U.S. citizens and residents may not claim Article 17(1)(b) or Article 18 for them. The arrangement states that this reflects the countries’ original intent.

The same features fail Rev. Proc. 2020-17. Contributions not limited to earned income fail section 5.03(3) and, for a scheme without another qualifying limit, section 5.03(4). Expect full § 6048 reporting for these schemes, and review the client’s income tax positions for past years.

10. Reporting that applies regardless: Form 8938, FBAR, Form 8621

11. Penalties and relief for past years

• Assessed penalties for an exempt plan. Rev. Proc. 2020-17, section 6, lets an eligible individual request abatement or refund of § 6677 penalties on Form 843, whether or not the failure was due to reasonable cause. The request is subject to the §§ 6402 and 6511 limits. Write “Relief pursuant to Revenue Procedure 2020-17” on line 7 and explain how the individual meets section 5.02 and the trust meets section 5.03 or 5.04. Mail it to Internal Revenue Service, Ogden, UT 84201-0027 (section 6.02).
• Plans that are not exempt. Penalties can be avoided only for reasonable cause and not willful neglect (§ 6677(d)). The statute says foreign-law penalties for disclosing information are not reasonable cause. See our reasonable cause guide.
• Income tax first. Every exemption requires the income tax side to be right. Under section 5.02, the individual must be, or come into, compliance for all open years. Under Rev. Proc. 2014-55, section 4.01, the individual must not have reported the accrued income. Resolve the income tax treatment before deciding the reporting.

12. Authorities

More countries will be added as their treaty texts and Technical Explanations are reviewed. The step-by-step test applies to any country today.