McDermott Will & Emory has a summary of the provisions for non-U.S. retirement plans in the allegedly-final FATCA regulations. While the regulations for banks provide incomplete protection for U.S. persons abroad by forbidding only “local FFIs” and not other categories of FFIs from discriminating against us, the regulations applying to retirement plans are even worse.
Narrow Participation Retirement Plans. A non-U.S. retirement plan established to provide retirement, disability and/or death benefits for its current or former employees and designated beneficiaries will be exempt from FATCA if these qualifications are met:
- The plan has fewer than 50 participants.
- The plan is sponsored by one or more employers that are not investment entities or passive non-financial foreign entities.
- The plan is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in its home country.
- Participants not resident in the plan’s home country are not entitled to more than 20 percent of the plan’s assets.
- Employee and employer contributions to the plan (other than transfers from certain retirement savings accounts or other exempt retirement plans) are limited by reference to earned income and compensation, respectively.
As should be obvious to anyone besides an IRS bureaucrat or Congressional demagogue screaming about “wealthy people fleeing the country with ill-gotten gains”, an employer has no control over its employees’ decisions to leave the country in which the retirement plan is established — least of all after those employees have become former employees — but employees often retain an interest in retirement plans until their retirement, even after leaving the company which set up the plan. This is of particular concern in small countries where temporary expatriation to work overseas for a few years is a matter of course for any ambitious young person, as well as in industries which often bring in large numbers of non-local employees for short-to-medium-term assignments.
The most obvious preventative measure a small business can take to keep its retirement plan from losing its FATCA “narrow participation” exemption — and having to bear the full cost of compliance — is to avoid hiring people who might show a high propensity to emigrate in the future. The most obvious category of such people: immigrants and dual citizens, not just Americans but people of any nationality or background not indigenous to the country of the retirement plan. Even religion could affect hiring decisions: after all, a potential Jewish hire might one day decide to make aliyah to Israel, a Rastafarian might move to Ethiopia, and indeed a person of any minority religion might want to raise his future children in a country where that religion is in the majority — better to send them all rejection letters so there’s no possibility they’ll count towards the 20% in the future.
In my case, I have an interest in a Hong Kong retirement plan in which well over half of the participants no longer reside in Hong Kong. The head office had a habit of hiring former Hong Kong residents who had settled overseas and sending them to the Hong Kong office (where they didn’t need work visas) for rotations of a couple of years before sending them to other offices — and since they were right-of-abode holders who had already emigrated from Hong Kong once, they couldn’t withdraw their retirement assets when leaving Hong Kong for the second time. And when they finally closed the Hong Kong office, at least a third of the staff were offered positions in other Asian and European offices.
Of course, facing up to full FATCA compliance is a much less scary prospect for a retirement plan if the plan administrators are certain that it has no U.S. Person participants, so the easy way around this is simply to avoid hiring any Americans, and to harass the ones you already hired into to quitting and cashing out their plan interests.
Just another example of how completely stupid FATCA is. FATCA does nothing to help people distinguish between the relative performance levels of different financial institutions with regards to their market acumen or customer service. FATCA’s sole means of distinguishiing between financial institutions employs the sole criteria of putting them into differing categories based upon their ability to conform to U.S. tax paperwork. None of which does anything to improve their bottom line. FATCA is a useless regulatory tax on the worldwide financial industry that will lead to a worldwide economic slowdown.
I wonder if anyone will ever care to measure the toll that FATCA compliance will take on worldwide growth in GDP?
These are great points @swisspinoy.
Reminds me of USCitizenAbroad’s post:
Cook v. Tait 7: Equality: Law prohibits both rich and poor from sleeping on park bench
“Assuming the U.S. continues to levy taxes on the incomes of U.S. citizens abroad (and therefore residents of other countries) should the approach be that of 18th century France or 20th Century Canada? In other words, should the principle be:
1. Every U.S. citizen should be subjected to exactly the same rules; or
2. Should different rules be designed to ensure that all U.S. citizens pay tax but that the rules are reasonable for U.S. citizens abroad?
At the present time, with the exception of the Foreign Earned Income Exclusion, U.S. citizens abroad and homelanders are subject to the same rules. It’s just the the rules have a disproportionate and disabling effect on U.S. citizens abroad. The rules mean something very different to U.S. citizens abroad.”
My wife’s employment has an RRSP, but she has had to opt out in order to not incur punishing tax implications. This has put a major damper on the capacity to be able to retire as we or at least she, will not be able to accumulate enough retirement savings to be able to be secure in our old age.
@bubblebustin says- There is no way to apply U.S. taxation laws to U.S. persons abroad that will level the playing field for them vis a vis homelanders. The principals of taxation just won’t allow such an arrangement to equitably apply the tax burden on income earned in the U.S. to income that is earned abroad. Comparing the various tax systems is like comparing apples to oranges. The two objects share some similar traits that identify them as fruit but their constituent elements are fundamentally different and therefore prevent them from being used as tax systems that can be classified as being, “the same as”.
Sorry, those are great points, Eric.
From what I’ve read, the Finance regime over here is pushing very hard (as hard as HK people can ever push) to get MPF’s classified as compliant… which they really should be, since any retirement account program makes a pretty poor method for tax evasion. Especially a pretty poor retirement program. The trick is how to report them… are they a foreign trust, PFIC, employer sponsored pension plan (my story, and I’m stickin’ to it!). I sure don’t know, and I suspect the IRS doesn’t either.
(on that note, maybe it’s all for naught anyway, as an MPF with 50k USD in it of it’s own accord seems rather unlikely :P)