Taxpayers living outside the United States continue to be confused about when they have to file their 2013 U.S. Federal individual income tax returns and when they have to pay their 2013 income tax and 2014 Federal estimated income tax and there is also an issue as to whether participation in a Bermuda non qualified pension plan creates U.S. taxable income and if so, how much.
Are You Correctly Reporting Your Bermuda Pension Taxable Income?
If you have a vested interest in a Bermuda pension plan the answer could be “maybe.” We are not referring to a US 401(k) plan that most of the large exempt companies have for their employees. We are referring to the typical Bermuda employer plan where the employer and employee each contribute 5% of compensation. If you are a dual national or married to a Bermudian you likely participate in this type of plan that is commonly administered by Argus, BF&M, Colonial, or FMG.
Your initial question to your tax advisor should be; “is the Bermuda pension plan a qualified or non qualified pension plan under U.S. tax law.” Based on our experience we would say that it is likely that you are participating in a non qualified plan.
There are several U.S. tax issues connected with participation in a non qualified pension plan that can be put into 3 categories; the company and your contribution to the plan, the earnings within the plan and the growth in the plan.
Most knowledgeable accountants and attorneys would agree that your contribution to a non qualified pension plan is not deductible and that when you are vested in the plan the accumulated employer contribution is considered taxable income to you.
Are the earnings within the plan taxable? That would depend as issues such as are you a highly compensated employee and does the plan meet the minimum participation and minimum coverage rules. These rules have likely never been addressed with respect to your plan. To specifically answer that question would require a specialist needing access to company files. Generally speaking, the answer is that it is likely that such earnings are taxable. The downside of not reporting such income is that if the IRS disagrees with you they could take the position that you knowingly failed to report income.
The last issue deals with growth in the plan and the waters get murky. Several articles by knowledgeable attorneys and accountants disagree. But at an International Estate and Trust Conference I attended in New York City a few weeks ago the speaker was unequivocal that this was income. The speakers conclusion was that you should “mark to market” your foreign non qualified pension account each year.
But other issues also exist. Is the Bermuda pension plan considered a foreign grantor trust requiring the filing of Form 3520 and Form 3520A annually? As many of the investments in the Bermuda pension plans consists of foreign mutual funds does the plan fall under the Passive Foreign Investment Company rules requiring the filing of Form 8621 and if so, do you do this on an investment by investment basis or do you do one filing for the entire plan?
Another issue common to Bermuda is that if you change employers you will likely be required to remove the funds from the old employer plan into a personal pension plan. Does this transfer of funds result in a taxable distribution?
While many tax advisors have conflicting opinions on an area in which there is no direct authority at a minimum you should address this issue with your tax advisor prior to filing your 2013 tax return. And if you have not reported any income from the Bermuda pension plan in prior years you should consider consulting with a knowledgeable tax consultant.
2013 Filing Deadline
Treasury Regulation 1.6081-5 provides you with an automatic extension of time in which to file your 2013 U.S. Federal individual income tax return until June 16, 2014. But, the extension of time to file does not extend the time to pay any tax due.
2013 Tax Due
Any tax liability that you have with respect to your 2013 tax return should have been paid on or before April 15, 2014. A check in the amount of the tax due should have accompanied Form 4868 and been received by the IRS on or before April 15, 2014.
Postmarked or Received?
If you mail your tax return or a payment from the United States the envelope must be postmarked by April 15. If you mail your tax return or a payment from Bermuda it must be received by April 15, 2014. An alternative to mailing from Bermuda is to use a courier service. If you use FedEx and a few others designated by the IRS the postmark date is the date the private delivery service records in its database or marks on the mailing label. Realistically, if you wait until the last minute the chances of your being late and incurring a penalty has greatly increased.
2014 Estimated Income Taxes
Treasury Regulation 1.6081-5 does not provide you with an extension of time to pay your 2014 1st quarter tax payment which was due on April 15, 2014. If you missed that deadline you should consider doubling your 2014 2nd quarter payment which is due on June 16, 2014. If you do not catch up on your payments you will be subject to an underpayment penalty until you do.
Pay Your Tax Online
If you have a U.S. bank account and register with the IRS at www.eftps.gov you can make all your tax payments online. This will eliminate the need for mailing checks or paying for private delivery services.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.
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