USS pension and Form 3520

Hi, it's time for my annual tax question.

I've recently started receiving a tiny (about £350/year) USS pension distribution.  Does this mean that I need to check the box on line 8 of Schedule B, and also that I need to file Form 3520?

Thanks for any help on this.

I'm perpetually confused by how the USS scheme is dealt with. Professionals that I respect say that the IRS sees it as a non-qualified pension plan and a foreign trust. I don't know the exact reasons for this. It would be great if it was treated just like other employer sponsored pension plans.

So i don't have a definitive answer for you, but have a couple of questions. Did you try to get HMRC not to tax your USS payments by filing US-Individual-2002 and if so what did they say?
or are you paying UK tax on your distributions?

Thanks for the response.

Aside from a small amount of interest from a joint savings account I have with my UK citizen husband, this pension is my only income.  It's not being taxed because I fall well below the income threshold for taxation.

It would be great if you could just enter it on line 21 as "foreign pension", but strictly speaking if the USS is a foreign trust you should do the Schedule E, the 3520 and a 3250-A

Well, after two hours of trying to get through to the IRS in London, I finally got an answer.  And that is, that a pension is not what is meant by a distribution from a foreign trust, therefore I don't need to check yes on line 8 Schedule B, or file Form 3520.  Quite a relief, since I've looked at that form and would have no idea how to fill it in.

I've also emailed a question to the IRS in the states - hope they give me the same answer.

I think this is a sensible answer and you should note down the name of the IRS person.

Under US tax code USS pension is a non-qualified plan and treated as a foreign trust under IRC 402(b). However, it is organized under Chapter I of Part XIV of the Income and Corporation Taxes Act 1988 and so is one of the UK pension funds covered by the treaty. However, you could argue that as Article 17(1)(a) is subject to the savings clause for income distributions your USS pension is treated as a foreign trust on your US tax return and trust forms need to be filed, but as Article 18(1) is not subject to the savings clause the US cannot tax gains inside the pension, so you never have to pay tax on it until you take distributions. The tax you pay will be the same, whether you describe it as a pension or a trust but you'd have more paperwork if you take the trust route.

If you go with the IRS advice:

If you are US resident you should file a US-Individual-2002 to make sure no tax is withheld in the UK. You enter the pension amount on line 21 and write in foreign pension and maybe file 8833

If you are UK resident you would enter the pension amount on line 21 and maybe file 8833 and also file a 1116 to claim FTC for any UK tax.

Update:  I finally got a response to my IRS helpline query, and unfortunately it's not the one I was hoping for.  So yes, I do have to file 3520 (but not, I think. 3520-A).  It seems a bit ridiculous, given the paltry amount of the pension.  I think there should be a threshold below which these forms don't have to be completed.  Especially since the telephone helpline won't answer questions relating to 3520, even though the cost of getting professional advice would be pretty much the same as the amount I'm receiving, which makes the whole thing a bit pointless.

So you got one answer from the IRS section London and another from the IRS Stateside. Clear as mud then...

Well, after receiving the helpline answer, I then phoned the IRS helpline.  The person I spoke to was quite certain that I have to file form 3250, although he did try (but failed) to find a way out, given that the amount of money is so small.  He actually took me most of the way through the form, although unfortunately not all the way.  I then had another look at the form by myself, and found the really complicated bit at the bottom which he had not gotten to with me.  So I called the helpline again, but a different person answered, and would only say that Form 3520 questions are "out of scope" for the helpline, and I should seek professional advice.  I'm pretty annoyed about that.

I sympathise. I had a look at that form, went over it several times, it never made sense...

As the distribution is so small, can you cash out the USS pension, be done with it, take the hit? Just a thought....

I think there's a good argument that the 3520 does not need to be filed for the USS plan. Article 17(1)(a) does not apply to the income from any UK pension paid to a US citizen or resident because of the savings clause. So for the purposes of declaring income from a UK pension it looks like it has to be treated as coming from a foreign trust. Form 8833 would only need to be filed to claim treaty exemption form tax on any gains, it isn't applicable for income. Now onto 3520. The instructions to 3520 say (hat tip to theOAP)

"Form 3520 does not have to be filed to report the following transactions.

Distributions from foreign trusts that are taxable as compensation for services rendered (within the meaning of section 672(f)(2)(B) and its regulations), so long as the recipient reports the distribution as compensation income on its applicable federal income tax return."

http://www.irs.gov/instructions/i3520/ch01.html#d0e97

Your pension is part of the compensation you got while working for a UK university and if you include your pension income on line 21 of your 1040 and write in "foreign pension" you don't have to file the 3520.

So I'd do that and see what the IRS says.

FYI here are a number of articles that deal with how to report UK employer pensions. Remember that the tax treaty can be used to shelter gains from US taxation, but that is is not applicable for US citizens or residents when you receive income because of the savings clause.

http://www.buzzacott.co.uk/insights/how-us-citizens-can-make-the-most-of-uk-pensions-changes/34

http://www.expattaxandlaw.com/Foreign_Pensions_FAQ.html

http://intltax.typepad.com/intltax_blog/2012/01/income-accruing-in-foreign-retirement-plans.html

IMHO the majority or UK employer sponsored pension funds will be employee trusts and so you don't have to file a 3520. You should file an 8833 to claim tax treaty relief on any gains within the fund and enter any income you receive on line 21 of your 1040.

If you have a SIPP or other personal pension plan I would consult a professional as there is debate as to how those are handled.

Thanks for the comments.

Nun, I really appreciate your posts, they make a lot of sense.  It does seem ridiculous that any US citizen in the UK receiving an employee pension would have to submit that form every year.  I will go and have a look at those links.

By the way, do you know the penalty for not submitting that form?  I think it is something like 35% of the distribution received, which would not amount to much in my case.  But I think I also read that the penalty can be $10,000.

 I've had two different tax accountants (specialists) who have dealt with my USS distributions over the last few years. Neither has filed a 3520.

Marty, thanks for that.  I was thinking I was probably not the only US citizen receiving a USS pension.

If you don't mind, would you tell me how you handle question 8 on Schedule B, where it asks if you receive distributions from a foreign trust?