Under Singapore law, an employer generally must contribute a certain proportion of each employee’s wages to the Singapore Central Provident Fund (CPF). The employer is permitted to withhold up to half of the amount required to be contributed from each employee’s wages.
It is very similar to the US Social Security system, except the CPF is privatized.
Benefits from the CPF can be withdrawn for a variety of reasons, including for public housing, public transportation, home insurance, private housing, health care (including medical insurance), purchase of various types of investments, parents’ retirement needs, college education, and life insurance.
How Singapore CPF Accounts are Categorized in the US
All retirement plans under U.S. law are either defined benefit or defined contribution.
- A defined benefit plan provides a specified payment amount upon retirement.
- A defined contribution plan allows employees and employers to contribute and invest the funds over time; the amount in the pension will depend on the investment growth.
The CPF is a defined contribution plan. A defined contribution plan can be qualifying or non-qualifying.
You can assume that CPF accounts are non-qualifying and do not receive tax-favorable treatment under IRC 401.
In many cases, CPF accounts will be employees’ trusts per IRC 402(b). If so, the taxation would be as follows under 402(b).
Singapore CPF Employer Contributions
Section 402(b) (1) provides that contributions made by an employer to an employees’ trust are included in the employee’s gross income.
Section 1.402(b)-1(a) (1) of the regulations provides that employer contributions to a nonexempt employees’ trust shall be included as compensation in the employee’s gross income for the taxable year in which the contribution is made, but only to the extent that the employee’s interest in such contribution is substantially vested as defined in § 1.83-3(b).
Singapore CPF Distributions: no tax until vesting
Under § 402(b) (2), the amount actually distributed or made available to any distributee by any such trust is taxable to the distributee in the year so distributed or made available under § 72.
Therefore, when the owner of a CPF fund receives or is able to receive distributions from the fund, the fund become taxable.
Calculating Taxable Distributions from a Singapore CPF
CPF distributions are taxable to the extent of distributions in excess of the plan participant’s investment (i.e., basis). The ‘investment’ could potentially include employer and employee contributions.
However, the basis may not include contributions if:
- If services were performed while the employee was a nonresident of the U.S.,
- The contribution was not subject to tax in the U.S. or any foreign country, and
- The contribution was from non-U.S. source compensation