Illusory Revenue Procedure 2020-17
A self-invested personal pension (“SIPP”) is a highly advantageous personal pension plan available under United Kingdom law. Separate articles consider how SIPPs are reported for United States income tax purposes, U.S. income taxation of contributions to a SIPP, and U.S. income taxation of distributions from a SIPP.
Revenue Procedure 2020-17, I.R.B. 2020-12, issued by the Internal Revenue Service on March 2, 2020, purports to exempt certain tax-favored foreign retirement trusts or nonretirement trusts from information reporting on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. It was hoped that Rev. Proc. 2020-17 could exempt many SIPPs from information reporting on Forms 3520 or 3520-A. Upon analysis, however, Rev. Proc. 2020-17 proves unhelpful.
To qualify for the Rev. Proc. 2020-17 exemption from information reporting, a foreign retirement trust must meet six conditions:
- The trust must be generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction. For this purpose, a trust is tax-favored if it meets any one or more of the following conditions: (i) contributions to the trust that would otherwise be subject to tax are deductible or excluded from income, are taxed at a reduced rate, give rise to a tax credit, or are otherwise eligible for another tax benefit (such as a government subsidy or contribution); and (ii) taxation of investment income produced by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
- Annual information reporting with respect to the trust (or its participants or beneficiaries) is provided, or is otherwise available, to the relevant tax authorities in the trust’s jurisdiction.
- Only contributions with respect to income earned from the performance or personal services are permitted.
- Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust, or are subject to a lifetime limit of $1,000,000 or less to the trust. These contribution limits are determined using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the tax year (available at https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange).
- Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death, or penalties apply to withdrawals, distributions, or payments made before such conditions are met. A trust that otherwise meets this condition, but that allows withdrawals, distributions, or payments for in-service loans or for reasons such as hardship, educational purposes, or the purchase of a primary residence, will be treated as meeting the requirements of this section.
- In the case of an employer-maintained trust, the trust (alone or in combination with other trusts offered by the employer) is nondiscriminatory by meeting three tests: (i) the trust is made available to a wide range of employees, including rank-and-file employees; (ii) the trust actually provides significant benefits for a substantial majority of eligible employees; and (iii) the benefits actually provided under the trust to eligible employees are nondiscriminatory.
Whether a given SIPP meets these conditions must be determined on a case-by-case basis. Some of the conditions are more troublesome than others. For example, as to condition (3), a SIPP’s governing document must be examined to determine whether only contributions with respect to income earned from the performance or personal services are permitted. The U.K. legislation authorizing SIPPs does not so limit contributions to SIPPs.
As to condition (4), the U.K. legislation authorizing SIPPs does not limit contributions to SIPPs. It does, however, limit U.K. income tax deductions for contributions to SIPPs.
SIPPs must be tested on a case-by-case basis to determine whether they are nondiscriminatory under condition (6).
In the final analysis, Rev. Proc. 2020-17 is unlikely to provide any relief from information reporting on Forms 3520 or 3520-A. It could, however, be brought to bear in seeking relief from penalties assessed by the IRS for late filing of Form 3520 or Form 3520-A. I have so used it.