How to report UK workplace pension?

I suggest you go to a Uk/US qualified professional for your first filing so you make sure you get things right.

Firstly forget about your employer's supposed 16% contributions and instead each year declare the accrued pension benefit which is 1/80th of your salary.

Here's what I would do, but I'm not an expert here and offer this up just to help out. Please check with a professional.

Your US taxable earned income will include your 6.5% pension contribution that is UK tax deferred. You can then enter 1/80th of your salary as the accrued pension benefit on line 21. Forget the foreign earned income exclusion and use foreign tax credits, hopefully these will cover your US tax liability, including the tax on your 6.5% contribution and your accrued benefit.

Make sure you keep careful records as when you retire you will need to know the after tax amounts you and your employer have contributed to your pension so you can calculate the tax free portion of your pension.

Alternatively you could use the treaty to exclude your contribution and the accrued benefit which would be slightly simpler once you have figured out the 8833. But I'd ask a professional. I don't think your situation is that complicated so maybe call one of the companies like "Greenback" or "Taxes for Expats".

Your pension also includes a 3 x pension UK tax free lump sum at retirement. I'm not sure how to deal with this. Maybe you just wait until you retire and then deal with it on your US taxes.

What I am still unclear on is the issue of accrued benefits... For example:Where and how do I need to report this (form 3520?)? Is the value of 23/80 x salary (captial value as indicated in the USS prospectus) acceptable or do I need to find and use an IRS multiplier?
If its possible to declare and pay (offset with tax credits) tax on the full accrued benefit so the entire pension is US tax free that seems like a good idea. But how to do that in practise? I would need to somehow exclude the employer + employee contributions and put the acrued benefit (to avoid being taxed twice on both contributions and accrued benefit)? Or do the employer + employee contributions as above and add further income of [23/80*salary - (employer+employee contributions)]?

Or is this a mistake and the best one can do is taxing the contributions and the gains must be calculated at the start of retirement?

where does the 23/80*salary come from? How long have you been paying into USS?
 

Firstly forget about your employer's supposed 16% contributions and instead each year declare the accrued pension benefit which is 1/80th of your salary.

But where does this 1/80 come from? The capital value of the accrued benefit I receive each year is 23/80 of my salary in that year according the USS guide. But do the IRS recognise this 20x multiplier?

Your US taxable earned income will include your 6.5% pension contribution that is UK tax deferred. You can then enter 1/80th of your salary as the accrued pension benefit on line 21. Forget the foreign earned income exclusion and use foreign tax credits, hopefully these will cover your US tax liability, including the tax on your 6.5% contribution and your accrued benefit.

Thanks, I appreciate the advice. For 2012 I have to use the foreign earned income because for 8 months I was on an untaxed postdoctoral stipend. As above I don't understand where the 1/80th comes from and it seems far too low. I don't want to use the treaty and would love to put the full accrued benefit in but I just don't understand how to do it. At least putting the employer contributions seems to be the more standard approach and I can see how to do it.

where does the 23/80*salary come from? How long have you been paying into USS?

Where does the 1/80 come from? 1/80 is the pension pay out I will receive every year as a result of that year of service. But surely since I will receive it for many years I can not just declare the single year value.
According to the USS guide (page 10) the capital value of the pension can be calculated with a multiplier of 20 (I guess assuming average 20 years of payouts), plus the 3x lump sum. This is the capital value used to calculate the HMRC maximum tax-free lump sum (which is 25% of this capital value).

It also makes sense, 23/80 is higher than the 16%, since it includes the employers contributions plus the future accrued gains. I do not see how I can possibly claim the accrued benefit is 1/80 of salary when the employer is contributing 12.8/80 (16%) of salary that needs to be accounted for.

Where does the 1/80 come from? 1/80 is the pension pay out I will receive every year as a result of that year of service. But surely since I will receive it for many years I can not just declare the single year value.
According to the USS guide (page 10) the capital value of the pension can be calculated with a multiplier of 20 (I guess assuming average 20 years of payouts), plus the 3x lump sum. This is the capital value used to calculate the HMRC maximum tax-free lump sum (which is 25% of this capital value).

It also makes sense, 23/80 is higher than the 16%, since it includes the employers contributions plus the future accrued gains. I do not see how I can possibly claim the accrued benefit is 1/80 of salary when the employer is contributing 12.8/80 (16%) of salary that needs to be accounted for.

Well in your first year your pension benefit is 1/80 x pension. I'm just going on annual accrued benefit. I'm not doing any annuity calculations for the future. I was thinking you'd leave those to when you take income.

I suppose you could calculate the amount that your employer would have to put into an annuity this year to pay you 1/80 of salary at your nominal retirement age.

Thanks nun,

I don't want to appear ungreatful because I really appreciate the advice I have received which has really helped me to understand this complicated area... but I don't see how that can possibly be right (to put 1/80 as my accrued benefit).

After 1 year of contributions, 1/80 of salary is the pension amount I will receive for every year that I claim the pension and in addition I will receive 3/80 of that years salary as a lump sum. I don't see how this is a quantity of interest to the IRS. The defined benefits of the pension scheme that I will receive in return for one years contributions are as I covered earlier 23/80 of the contribution years salary (this is the capital value of the defined benefits accrued from one year of contributions as defined in the USS guide).

I guess I don't understand how paying tax on 1.25% of salary (1/80) can possibly result in a lower taxed basis in the pension than if I paid tax on the employer contributions of 16%. Whereas if I paid tax on what I consider the accrued benefit (28.75%, 23/80) then I can see it should indeed result in a higher taxed basis, with only inflation/pension increase adjustment gains left to tax at the end.

However, since I can't find any information about whether this defiintion of accrued benefits is acceptable to the IRS it seems safer to declare the employer contributions which I am confident is OK, and which my advisor recommended (although I haven't yet had a chance to ask them about the accrued benefit issue).

So my main outstanding question relates to a comment from Goya:

You are required under code section 402(b) to enter the vested accrued benefit of the plan each year. This is a legal obligation and is not optional.

Where and how do I need to report this (form 3520?)? Is the value of 23/80 x salary (captial value as indicated in the USS prospectus) acceptable or do I need to find and use an IRS multiplier?

Thanks again

I thought a bit more about this and I am way off base.....ie wrong.

The way I now see it is that there are sort of two options...

1) use the the 6.5% plus 16% employer contributions, but as Guya says you actually need to declare the vested accrued benefit you have so

2) do you use the present value? ie 1/80th of salary every year or do you calculate the future value of that 1/80th of salary when you retire and pay the tax on that now? The latter seems to require some pretty big assumptions, but as you say maybe the x20 assumption is good enough. If you go the first route you'd pay a small amount of tax now and leave the tax on the gains to be paid when you retire. As you calculation of 28.75% of salary is greater than 16%+6.5% I would worry that you are paying too much tax.

Thanks nun,

As you calculation of 28.75% of salary is greater than 16%+6.5% I would worry that you are paying too much tax.

Well I wasn't so worried about this. I was thinking it is all getting taxed in the end (whether at distribution or going in) so paying more now just spreads it out (and means more can be offset year by year). It should be more than the contributions because it is including the gains in the plan.

Unfortunately after feeling like I had a handle on it today I spoke to the advisor I have retained who advised me to just put everything in 2555 (employee contributions, employer contributions, accrued gains in the pension) which goes against everything I read on here. So my headache is back and I am again not sure what to do!

PS
In my continued informal sample of US citizens in the same plan 7/9 are not filing and the other 2 ignore employer contributions. So perhaps I am just worrying too much!

Could my advisor be right that employer contributions can be excluded (although it seems to go against established wisdom here)....

This page http://www.irs.gov/Businesses/Foreign-Earned-Income-Exclusion-1 says that:

Pension or annuity payments, including social security benefits

Cannot be included in the exemption, but doesn't this refer to payments (ie distributions) from a pension rather than employer contributions?

Could anyone point me to the canonical IRS rules which determine the fact the employer contributions cannot be excluded (so that I can forward this to my tax advisor!)

What qualifications does the tax advisor possess? This is important for you to know because unless your advisor has substantial authority to argue that any Section of the Internal Revenue Code is unconstitutional (and I am not aware of any legitimate arguments to such effect) your advisor puts his or her professional licences and insurance at risk.  You would be foolish to sign a return on such basis unless you have a particular desire to perjure yourself and by so doing wish to visit a Federal penitentiary.

They didn't really argue anything was unconstitutional (I am not sure where that comes from)... they said that employers contributions should go on the 2555 - when I mentioned I had read differently online they said that was wrong information and it should count as earned income, since it was remuneration for my professional services (ie it is an earned benefit).

Could you point to the IRS documents that state that employer contributions cannot be included on 2555? The text I quoted above about pension payments I think refers to distributions rather than contributions.

I am not sure how clear I can be. What qualifications does your advisor possess?

The question here is not what "IRS documents" say as while quite interesting reading they are not the law (although they are naturally normally correct in their interpretation of the law). The issue you have highlighted here is that your adviser is suggesting that you do something contrary to Federal law. What qualifications does your advisor possess?

While I understand your point I don't want to make this discussion about my advisor (or reveal any information about them).

I think it is enough just to say you think that their view is incorrect. I can see from your history on this forum that you are very knowledgeable so that definitely counts for something and I will seek a second opinion from a different professional.

Maybe the easiest thing to do is just to use the treaty to exclude yours and your employer's stated 16% contribution and any gains in the plan from current taxation. Then just pay income tax on withdrawals. The paying of tax upfront is really only a benefit if you retire back to the US anyway so if that's not on the cards just go the easier Treaty exclusion route.

Maybe the easiest thing to do is just to use the treaty to exclude yours and your employer's stated 16% contribution and any gains in the plan from current taxation. Then just pay income tax on withdrawals. The paying of tax upfront is really only a benefit if you retire back to the US anyway so if that's not on the cards just go the easier Treaty exclusion route.

Thanks nun.

Yes maybe it would be simpler. I understood the tax saving would come from the lump sum payment, which is tax free in the UK, but I would have to pay US tax on even if I was living in the UK. The actual yearly payments it doesn't matter as I have to pay UK income tax on them anyway which would cancel any US tax owing.

But maybe I could save up enough credits in the 10 years proceeding, and it is by no means certain anyway I will stay in this plan for the long term (I am on a fixed term contract at the moment) so probably the lump sum will not be so big with only a few years contribution.

I definitely don't want to use the treaty for 2012 at least (only 4 months of pension contributions) because I understand it can raise the "risk factor" for the streamlined compliance process.

But anyway - I don't understand how to fill out the 8833 should I want to chose the treaty route. I have to put in the particular part of the particular treaty and I am not sure what it is (or if there are multiple ones etc.)

I think you should get advice from the US Embassy tax folks about how exactly to fill in the 8833 of just go to someone like Taxes for Expats who must do a lot of returns like yours each year.

Take the simplest approach and set about expatriating asap. That should be a relatively easy procedure for you and then you don't have any wories about US tax any more.