CASE OF THE WEEK – Qualified Recognized Overseas Pension Scheme

By Jenny Kiffmeyer, J.D – The Retirement Learning Center

Qualified Recognized Overseas Pension Scheme

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to retirement income. The advisor asked: “One of my clients handed me a British Pension Statement and some transfer documentation. He would like to move the assets to the United States, ideally to an IRA or his workplace retirement plan. Can your review the documentation and explain what his U.S. rollover options are?”

Highlights of the Discussion

Upon review of your client’s British Pension paperwork, the only option he would have to move the assets to the U.S. would be through a transfer to a QROPS. QROPS stands for Qualified Recognized Overseas Pensions Scheme, which is a pension arrangement sanctioned by Her Majesty’s Revenue and Customs (HMRC) agency and set up outside the United Kingdom (UK).

Here is list of pension schemes that have notified HMRC they meet the conditions necessary to be considered a QROPS (QROPS List). For several countries, including the USA, this warning appears:

“The requirements to be a ROPS changed from 6 April 2017. You’ll need to check that the scheme you’re transferring to on or after that date meets the new requirements. HMRC cannot guarantee these are ROPS or that any transfers to them will be free of UK tax.”

QROPS may receive asset transfers from UK pension plans. They are often used by expatriates to simplify the management of their retirement assets by consolidating disparate foreign pension plan assets in one account. The UK government allows transfers to QROPS to be made free of UK tax because they enable people permanently leaving the UK to take their pension savings with them to their new country of residence.

As of March 9, 2017, the UK began imposing a 25% tax charge on a transfer to a QROPS unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the European Economic Area (EEA) or the QROPS is provided by the individual’s employer.

Regarding whether QROPS are eligible for rollover to a US-based IRA or retirement plan—the answer is no. Rollovers may only come from a “qualified trust” as defined under Internal Revenue Code Section (IRC §) 402(c)(4). QROPS do not fall under this definition.  An IRS advice memorandum (Number AM2008-009) affirms the IRS’s rollover denial in the case of QROPS, although it cannot be cited as precedent.

Taxation of amounts distributed from a QROPS depends upon the country of jurisdiction for the QROPS and the tax treaty of the country in which the distribution recipient resides. QROPS vary by jurisdiction and some QROPS are incompatible with US tax law, which results in greater tax liability. The US accepts QROPS in Malta and other similar pensions as compliant with U.S. tax rules. Historically, Maltese QROPS did not have to be reported to the IRS and their owners could avoid income tax on distributions and earnings.

On December 21, 2021, the US and Malta competent authorities confirmed their understanding of the meaning of “pension fund” for purposes of the US-Malta income tax treaty. The guidance clarified the provisions of the Tax Treaty that allow individuals to take advantage of the favorable tax treatment of personal retirement schemes established in Malta. The IRS later issued a similar notice (IR-2021-253) and warned individuals it would be scrutinizing such arrangements carefully.

There are other USA ROPS that have reported to Her Majesty’s Revenue and Customs (HMRC—tax system in the UK) that they are qualified ROPS, but an individual must confirm on their own what tax implications could apply.

Conclusion

Owners of QROPS may not roll the assets to a US-based IRA or qualified retirement plan. Because there are extreme variations in the tax treatment of QROPS depending on the QROPS jurisdiction and the owner’s country of residency, taxpayers with QROPS should seek out tax advisors who specialize in this space.

Pattern

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