Once again, the IRS has proposed new regulations to simplify reporting for foreign, trust-based pensions, but it doesn’t quite meet the mark. Here’s our contribution to their request for feedback with specific comments to ensure that UK plans benefit from the simplification.

Self-Invested Personal Pensions (SIPPs) are common UK pension vehicles, often used by the self-employed, members of partnerships or by those who may consolidate multiple employer pensions. Frequently they are written under trust and so from a US perspective, they are considered to be Foreign Grantor Trusts which have additional, onerous reporting obligations where annual forms 3520 and 3520-A must be filed to report the activity within the pension. Generally, the provisions of the US/UK tax treaty can be invoked to prevent there being an additional tax burden, but the reporting remains.

In 2020, we published this insight about the then new IRS Revenue Procedure which intended to offer simplified reporting for foreign, trust-based pensions held by US persons. Unfortunately, the stringent qualifying conditions meant that UK plans couldn’t benefit. We raised questions with the IRS at the time, but delays caused by the global pandemic meant nothing further was heard on the subject until new proposed regulations were issued in May 2024, with requests for comment.

We have long recognised that the US rules on the reporting of such pensions creates a frustrating compliance burden and cost for our US clients and adds complications and obstacles to what, for any other UK resident, would be standard tax and pension planning. We therefore considered it important to make a submission to the IRS to suggest how the proposed regulations should be adjusted to achieve the apparent goal of removing the annual form 3520/3520-A filing requirements in respect of certain foreign trusts.

The IRS received over 1,500 submissions from impacted taxpayers and tax professionals alike, which were a mixture of general comments, laments over the existence of the rules, and more specific analysis of the proposed regulations and why they do not currently work. Our own submission worked through the applicable qualifying conditions step by step, detailing where we believe the IRS is falling short and offering our suggestions on how to fix them.

Disappointingly, these new proposals, as drafted, still fail to cover impacted UK pension arrangements. This is essentially due to conflicts between the IRS’ desire for specific qualifying thresholds for individuals and the UK’s broader rules. For example, the IRS wishes to include a contribution limitation whereby contributions are limited by the laws governing the trust to one of the following:

• A percentage of earnings income or,

• An annual limit of $75,000 or,

• A lifetime limit of $1,000,000.

However, under UK laws there are no such limits on what can be contributed into a SIPP, rather there are limits on what can be contributed tax efficiently, which is not the same. We suggested removing the requirement that the laws governing the trust impose contribution limits and instead base the filing exemption on the personal circumstances of the individual making the contribution.

It’s encouraging to see that the IRS does recognise the troubles that the current regulations create, and we’re hopeful that the next iteration of these regulations will follow the advice contained with our, and others’, submissions to remove this onerous tax reporting burden and allow US taxpayers a greater range of pension planning opportunities.

What should you do?

If the regulations are tidied up and UK plans are covered, then it will only cover filing obligations from the 2024 tax year onwards. Therefore, if you have such plans that date before 2024, then it is important to continue to file the necessary forms.

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