by Denise Appleby CISP, CRC, CRPS, CRSP, APA
United States (U.S.) citizens with savings in foreign pension plans are often faced with the dilemma of what to do with those savings when they decide to return to the U.S. In many cases, the objective is to continue the tax-deferral treatment of these amounts, until the funds are needed to finance retirement expenses. At that time, many individuals often attempt to rollover these funds to their U.S. IRAs or employer sponsored plans. However, a rollover of these funds to a U.S. retirement plan is not permitted. This article explains why these amounts are not rollover-eligible.
Rollover Eligible Amounts
Only amounts that are rollover-eligible can be rolled over to an IRA or employer-sponsored plan. The internal revenue code (IRC) ( The Code) section of the United States Tax Code defines a rollover- eligible distribution as an employee’s balance in a qualified trust, except for amounts which include the following[1]:
- (A)Any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made—
- (i) over the life-expectancy the employee or the joint life expectancy of the employee and the employee’s designated beneficiary, or
- (ii)for a specified period of 10 years or more,
- (B) any required minimum (RMD) distribution amount due for the year that the distribution is made from the account,
- (C) hardship withdrawal amounts
- (D) excess contributions returned to the employee, including excess salary deferral amounts and amounts in excess of the annual addition limit,
- (E) dividends paid on employer stocks,
- (F)PS 58 costs, and
- (G) loans treated as deemed distributions
Qualified Trust Defined
The question then becomes, what is a ‘qualified trust’. This term has various meanings, depending on the circumstances under which it is used, and the Tax Code provides the specific definition for such circumstances. In this case, the Tax Code defines a qualified trust as any of the following:
- (i)a traditional IRA, including a SEP IRA [ defined under IRC § 408(a)]
- (ii)a traditional IRA which is an annuity (other than an endowment contract)[defined under IRC § 408(b)] ,
- (iii)a qualified plan [defined under IRC § 401(a)
- (iv)an annuity plan defined under IRC § 403(a)
- (v)a governmental deferred compensation plan defined under IRC §457(b) plan, and
- (vi)an annuity contract or custodian account defined under IRC § 403(b) account
Note: For this purpose, a qualified trust also includes designated Roth account (defined under IRC § 402A) except that the receiving account can only be another designated Roth account or a Roth IRA.
Notice that all of these accounts fall under various sections of the Tax Code, and since foreign pension plans are not governed by the U.S. Tax Code, they cannot be classified as qualified trusts. Accordingly, amounts from these (foreign pension) plans cannot be rolled over to any of the retirement accounts listed above.
QROPs and UK Pension Schemes
Literature stating that assets from United Kingdom Pension Schemes as well as assets held in Qualified Recognised[2] Overseas Pension Scheme (QROPS) can be rolled over to IRAs in the United States has been published on the Internet at various seemingly reputable websites, and has otherwise been distributed to individuals holding such assets. However as we noted above, that is incorrect as QROPS do not fall under the definition of a qualified trust.
No Exception under Treaties
One taxpayer went as far as to ask the IRS if the U.S.-U.K. income tax treaty could be relied on to allow a rollover from a UK Pension Scheme to a qualified trust, and thus allow the continuance of tax-deferred treatment . In their response, the IRS confirmed that such a rollover would be permitted between two U.K. Pension Schemes, but not from a U.K. Pension Scheme to a qualified trust, because a distribution from a U.K. Pension Scheme cannot qualify to be a rollover-eligible amount [3]
Conclusion
Individuals with savings in foreign pension plans and annuity schemes, including superannuation schemes, may exercise one of two options. They can either leave the funds in those respective accounts and make pension withdrawals overtime, or withdraw lump-sum amounts and handle any tax implications as required. If amounts from these accounts are sent to the U.S. they cannot be sent to qualified trust accounts, which means they cannot be rolled over to your IRA, 401(k), 403(b) or any other qualified trust account. If these amounts are inadvertently or erroneously sent to U.S. qualified trusts, they will be considered ineligible rollover amounts, which must be timely corrected in order to avoid penalties and possible income tax upon withdrawal.
[1] IRC §402(c)(4)
[2] UK Spelling
[3]Office of Chief Counsel IRS Memorandum # AM2008-009. Cannot be cited or used as precedent
