Reporting Withdrawal from Pillar 2 to IRS

grandeziper · 7 February 2012 03:03

Hi everyone. I am an American and am currently busy preparing my 2011 tax returns. I have a question about reporting a withdrawal from a pillar 2 pension to the IRS. I found this forum through some Googling and have read through a number of the posts on this subject. I've learned a lot, but I'm still unsure of what I need to do next. I am unfamiliar with the details of Swiss employment and pensions and I unfortunately don't speak German, French, Italian, or Romansh, so I'm getting bogged down with poor translations of unfamiliar terms. I'm hoping someone here can point me in the right direction.

Some background, in case it matters: my wife is American by birth. After living in Switzerland for a number of years, she became a naturalized Swiss citizen. In 2007, when she was 26, she left Switzerland and moved to the US. I met her shortly after she arrived. She's a lovely woman, but her taxes are causing me headaches

While she was working in Switzerland, she had something called an "LPP." My understanding is that this is the "pillar 2" or "2nd pillar" of the pension system. I think it is called "BVP" in German? From what I've read, the US does not recognize this as anything special, meaning that her share of the contributions were made "after taxes" as far as the IRS is concerned. I believe her employer's contributions would have counted as income and been reported on her US tax returns (although I don't think she ever made enough money in Switzerland to have to pay US income taxes). Is my understanding correct? Does the IRS not recognize an LPP as a pension?

In 2011, she had all of the money in the account withdrawn and transfered to a US bank. She had to file a lot of paperwork, prove that she left Switzerland, etc. When the process completed, we received a letter from the bank that held the account saying:

Compte de libre passage xxx

Versement de l'avoir de libre passage

Nous verserons l'avoir de libre passage, valeur dd.mm.yyyy, selon instructions.

..........................LPP CHF...Suroblig. CHF...Total CHF

Avoir de libre passage.......6000............5000.......11000

Intérêt........................30..............25. .........55

Montant du versement brut...............................11055

Impôt à la source.........................................330

Montant du versement net................................10725

My rough translation is "Vested benefits account xxx," "Payment of vested benefits," "We will pay the vested benefits, value as of dd.mm.yyyy, according to instructions," and then the table shows vested benefits, interest, gross amount, tax, and net amount. What do the "LPP" and "Suroblig." columns mean? I can't find a translation of "suroblig." Does anyone know what it means? Is the interest shown on this letter the interest earned over the lifetime of the account? There are no other dates on this letter, so it doesn't look like it's showing "interest earned last month" or "interest earned last year" or anything like that.

The only other statement we have is from 2007 when she left. It says "Avis de sortie."

Votre prestation de libre passage

Compte d'épargne constitué............................10250

Total de vos apports avec intérêts

...au taux LPP (date du dernier apport : 01.04.2007)...7000

Prestation de libre passage minimale selon règlement...8500

Avoir de vieillesse acquis selon la LPP................5500

Votre prestation de libre passage.....................10250

I can't reconcile any of the numbers on this 2007 statement with the 2011 letter mentioned above. "Votre prestation de libre passage" from 2007 is less than a thousand CHF off from "Montant du versement brut" from 2011. Anyone have any ideas on this? I can't explain it from the paperwork I have.

Between those two documents, is there enough information for me to report something to the IRS? If my understanding is correct that the contributes were already "after tax" as far as the IRS is concerned, do I just need to report the interest? Is there a special form for foreign interest of this type?

Finally, along with that letter that closed the account, we received a form that says, in part, "Please find enclosed an application form with which to reclaim withholding tax levied on the lump-sum capital payment made from your pension fund assets. Please complete the form in full and have it stamped by the tax authorities of your foreign residence." This form is thankfully in English, along with German, French, and Italian. In German, it is titled, "Antrag auf Rückerstattung der Quellensteuer auf Kapitalleistungen von Vorsorgeeinrichtungen mit Sitz in der Schweiz." It asks basic information, such as name, nationality, address, employer, amount of settlement, amount of tax, etc. Is this form to reclaim to the 330 CHF deducted in taxes? Is everyone eligible to get the tax refunded or does a refund only apply in special cases? Who is the tax authority in the US? Do I need to bring this to a local IRS branch? Will they know what to do or will I need to talk them through it?

I would appreciate any help anyone could provide. I've been looking at this for a few days now and I'm ready to scream.

marcott · 7 February 2012 09:22

Due to the differences in pensions between US and CH, basically what is advantageous to one system is a detriment in the other. Under US IRS tax laws, basically there is qualified pension plans, ie. 401k 403, etc.. that 'qualify' under the tax code for special tax status. The IRS does not recognise foreign pensions as qualified plans in most cases, and thus they are non-qualifed, and bring a lot of tax headaches at best. The swiss second and third pillars are case in point.

The Swiss-US double taxation treaty tries to alleviate some of this, but does a really bad job in my opinion (covers 1st pillar). But please have a look at it and see if it can help in your case.

So getting back to your wifes pension, if she was subject to US tax when she contributed to the plan, her contributions plus her employers contributions would have been taxable as income at the time. What I understand now, is that she has withdrawn this 2nd pillar. As it was a non-qualified plan, it was not possible to roll over into a US qualified plan. Outright withdrawal would also likely be taxable, as it was most likely a trust in the view of the IRS, taxed also on withdrawal.

Also, use the 'search' funtion for 2nd pillar withdrawals by US citizens, I think there is already some good commentary on the EF.

grandeziper · 7 February 2012 15:45

Thanks, runningdeer. I've read about two dozen threads on this in the forums, but haven't found a definitive answer for how to report the withdrawal. Most of the threads I've seen describe the steps required to withdraw the pension, how to transfer it to a canton with better tax rates, etc. I haven't seen anything that says "You need to file IRS Form XYZ and report the amount ABC." I called the IRS to ask and their answer was "read the tax treaty." The treaty is a bit of a dry read, to say the least. Article 18 covers Pensions and Annuities and says:

Assuming "Contracting State" is Switzerland, then it seems like her pension is not taxable in the US and the Swiss tax she paid upon withdrawal should be the end of it. But, I'm sure it's not that simple.

Can anyone recommend a tax professional in the Boston area that has experience with Swiss pensions? Alternatively, a US tax preparer based near Lausanne could help too.

marcott · 8 February 2012 09:55

Have a look at this thread, it should help. US tax libilities on CH Pension .Help wanted!

If I understand correctly, she should pay tax on the withdrawal whereever she was resident at the time of the withdrawal. I think the double taxation treaty would protect so that she wouldn't be taxed twice on the same withdrawal. I am no tax expert. For US tax, expat, expertise perhaps check out www.aca.ch , they have a number of tax experts on that site specifically for US expat issues.

saheem · 8 February 2012 12:54

Per the tax treaty: not taxable by the US, so not reportable either. The IRS penalties are for non-payment of taxes, not for errors in line items on the tax return. So, either don't report it or attach a letter explaining the amount withdrawn, and why it is not included in the tax return.

Last, but not least, find a US tax professional in CH -- there are several -- to help you.

rameli · 13 June 2012 23:41

Almeida,

Wonder if you ever got a definitive answer on this question as I am now going through the same process. I am withdrawing funds from my LPP, and have received conflicting information as to whether I must roll it into an IRA, or whether the dollars are after tax dollars and should definitely NOT be put into an IRA.

Obviously, I don't want to make a costly mistake, nor do I want to do something illegal.

Would love to know if you found someone able to advise you on the appropriate procedure.

Thanks!

grandeziper · 19 June 2012 16:59

Hi athgeneva. I spent a lot of time researching this. I talked to the IRS a few times via their 1-800 number, but we never contacted a tax advisor. The IRS told me that distributions from Swiss pensions are considered income. As advised by the IRS, we reported the total distribution on line 16a of our 2011 1040. This was the "Avoir de libre passage" I mentioned previously. We also had to fill out line 16b, which is the taxable amount. The IRS told me to take the total, subtract the cost (i.e., her contributions to the pension), and report the rest on 16b. Unfortunately, we didn't have a complete history of her account, so we had to make a best guess. One of her statements showed her contributions and her employers' contributions separately, so we used the amount from that statement as her cost. As I said, the total, minus that cost, is the taxable amount, which we reported on line 16b. Basically, her employers' contribution and all interest was reported to the IRS. We reported the same amounts to Massachusetts for our state returns. Both our federal return and our state return were accepted, but who knows if we'll be audited in the future.

A lot of people claim that the IRS doesn't recognize Swiss pensions and therefore they are not taxed, but that isn't true from what I've read of the US-Swiss tax treaty and from what the IRS agents told me. It's possible that we overestimated the taxable portion, but we figured what we did was safest. Also, for us, because there wasn't that much money in her pension, the end result wasn't much different if we changed the math.

Let me know if you discover anything different. Good luck!