Breaking News – 3520 and 3520-A not required for foreign retirement and education trusts

The announcement by Internal Revenue Service yesterday via Revenue Procedure 2020-17 offers a big relief to many taxpayers with foreign retirement fund account or education, medical or disability trusts. Following are the salient features of the Rev. Proc.:

  • The Rev Proc provides exemption from filing Forms 3520 and 3520-A for an “eligible individual’s” transactions with, or ownership of, an “applicable tax-favored foreign trust” (ATFFT)
  • An eligible individual generally means an individual who is a U.S. citizen or resident and who is compliant with all requirements for filing U.S. federal income tax returns and has reported as income (to the extent required) any contributions to, earnings of, or distributions from, an ATFFT.
  • ATFFT includes foreign pension or a tax favored foreign retirement trust and foreign medical, disability or educational trust or a tax favored foreign non-retirement savings trust.

Retirement Trusts:

  • Tax favored retirement trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits.
  • The trust must only permit contributions with respect to income earned from the performance of personal services.
  • Contributions to the trust must: (a) be limited by a percentage of earned income of the participant, (b) be subject to an annual contribution limit of $50,000 or less, or (c) be subject to a lifetime contribution limit of $1,000,000 or less.
  • Withdrawals from the trust must be conditioned upon reaching a specified retirement age, disability, or death, or penalties must apply to withdrawals made before such conditions are met. However, an exception is provided for early withdrawals for hardship or educational purposes, or for the purchase of a primary residence.
  • Employer provided trusts must be non discriminatory

Non-retirement Trusts:

  • Trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits.
  • Contributions to the trust must be limited to $10,000 or less annually or $200,000 or less on a lifetime basis
  • Withdrawals from the trust must be conditioned upon the provision of medical, disability, or educational benefits, or penalties must apply to withdrawals made before such conditions are met.

Cherry on the top!

  • Penalties are not applicable in case of the above trusts because ATFFT is exempt from reporting on 3520 and 3520-A
  • Rev Proc also includes procedures for the eligible individuals who have been assessed penalty for failing to comply with IRC 6048, to request abatement of the penalty assessed
  • Rev Proc also describes the procedure to claim refund of the previously paid penalty

This is a tremendous news for many taxpayers who have such qualifying accounts/ trusts in foreign countries. For example dual residents of U.S. and Canada who have RESP accounts will now breathe a sigh of relief.