An alert from the Chicago-based law firm Winston & Strawn notes these employers may be required to register those plans with the U.S. Internal Revenue Service (IRS) as foreign financial institutions (FFIs) by April 25. They may also need to comply with certain FATCA withholding and reporting obligations starting on July 1.
Sherene Awad Jodrey, an associate with Winston & Strawn, notes in the alert FATCA is a U.S. federal law designed to enforce the IRS policy of taxing U.S. taxpayers on all worldwide income. She explains that under FATCA, an FFI subject to the reporting and withholding obligations is defined extremely broadly and includes non-U.S. retirement plans, subject to certain exemptions. If a non-U.S. retirement plan qualifies as an FFI, it is required to register as such with the IRS by the April 25 deadline and agree to report a range of information about U.S. taxpayer participants in the plan. This includes personal identification information, account balance information and withdrawal records, which are subject to each participant’s consent to such disclosure.
If a U.S. taxpayer participant with an account balance of at least $50,000 in the plan refuses to allow the FFI to report this information to the IRS, the FFI is instead required to report these non-consenting participants to the IRS and withhold a 30% tax on certain payments from the plan to the participant. Reporting for the period July 1 to December 31, 2014, is due by March 31, 2015. Going forward, March 31 will be the reporting deadline for the entire prior year.
She adds that if a plan that is required to register as an FFI fails to register or otherwise fails to comply with its reporting and withholding obligations under FATCA, the plan will be subject to a 30% withholding tax on any U.S. source income paid to the plan. “U.S. source income” would mean any income earned from assets invested in U.S.-based stocks, bonds, mutual funds, or other investment vehicles.
Plans that qualify as exempt from the FFI registration include:
- “Broad participation” retirement funds;
- “Narrow participation” retirement funds;
- Treaty-qualified retirement funds;
- Funds similar to U.S. qualified plans;
- Investment vehicles used exclusively for retirement funds: and
- Pension funds of governmental and international organization employers.
The exemptions and how to claim them are described further in the alert.
Jodrey concludes that given the approaching deadlines for FATCA compliance, companies with overseas operations that sponsor retirement plans abroad should take time to assess whether those plan are required to register as FFIs, as well as comply with applicable reporting and withholding obligations.