The Mandatory Provident Fund (MPF) is a compulsory saving scheme for the retirement of Hong Kong residents.
Most employees and employers are required to contribute monthly to the mandatory provident fund scheme.
When a U.S. tax resident owns an MPF, it can trigger various U.S. filing requirements.
A non-qualifying defined benefit pension plan is by default a trust. As a trust it can be an employees’ trust under IRC 402 or a grantor trust.
If it is a grantor trust, then the filer may have a Form 3520 filing requirement.
However, there are exceptions for tax-favored foreign retirement trusts, excepting the taxpayer from filing a Form 3520.
Reporting of capital gain
The owner of a grantor trust must report all capital gain and loss on the account, in addition to any ordinary income.
If an employee’s contributions are attributable to 50% or less of the total asset, and if the plan is broad-based and non-discriminatory, then it is an employees’ trust.
In an employees trust, there is no Form 3520 filing requirement and any unrealized gain or income is tax-deferred until distribution.
Under a broad-based plan (which meets both coverage and participation tests), the pension is not taxed until distribution. If a plan is non-broad-based then highly-compensated employees will be taxed on earnings within the pension. A highly-compensated employee is one that has either a 5% or greater owner of the company or has compensation of at least $120,000 annually (periodically inflation adjusted).
FBAR and Form 8938
The MPF is considered a foreign financial account for FBAR filing purposes. And it is considered a specified foreign financial asset for Form 8938 filing purposes.
Therefore, MPFs are required to be reported both on the FBAR and Form 8938.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs: