Pillar 2: A Deep Dive into the Swiss Pension System for American Expats
This Swiss Pillar article was produced in collaboration with Connected Financial Planning.
Occupational Pension or Work Pension
This Pillar 2 plan is similar to the US 401(k) and 403(b) type plans. It is comprised of two parts:
1. Mandatory benefits (BVG-LPP)
For those who are self-employed, you may choose to make voluntary contributions. If you choose to make these contributions, you must contribute to both the employer and employee portions.
The minimum combined contribution to Pillar 2 is age-dependent based on the amount of your salary over the salary minimum mentioned earlier, as follows:
- 25 to 34 years old: 7%
- 35 to 44 years old: 10%
- 45 to 54 years old: 15%
- 55 to 64 years (for women) or 65 (for men): 18%
In the above example, you can begin to see the difference in calculating your taxable compensation in Switzerland versus the US. In Switzerland, your taxable compensation is reduced by your contributions to Pillar 1 and Pillar 2, while in the US, your employer contributions and growth are additions to your US taxable income. In the example above, while your initial gross salary is the same, there is a 30,300 difference in taxable compensation.
Taxation During Distribution Years
Upon leaving Switzerland or choosing to retire in Switzerland, there are three options for receiving Pillar 2 benefits:
1. An annuity
For residents of Switzerland, annuities will be taxed at your ordinary income tax rates. Any Swiss tax you pay can then be used as a foreign tax credit on your US tax return.
For non-residents of Switzerland, annuities will only face Swiss taxation if there is no income tax treaty with your resident country or the treaty grants the taxation right to Switzerland. If you are living in the US at distribution, the treaty states that the resident country gets to tax the distribution, so the US taxes the distribution and there is no Swiss tax owed. Keep in mind that sometimes it makes sense to distribute before moving to the US to avoid possible state taxation on the distribution.
There are exceptions to the above which can apply if your Pillar 2 funds are from public services.
For your US taxes, since your contributions were already taxed (assuming your US returns were properly prepared for all years you were in the Swiss plan), you can recover a portion of that tax basis with each distribution. Any amount that exceeds your tax basis will be taxed at your US ordinary income tax rates. You can then use any Swiss taxes paid as foreign tax credits to avoid double tax on the taxable portion. Distributions via an annuity may require additional calculations under US rules, and you should seek professional help.
2. A lump sum
For residents of Switzerland, lump sum distributions receive favorable tax rates that vary depending on the location of tax residency upon distribution. You can expect a rate between 4-15%.
For non-residents of Switzerland, lump sum tax rates are applied. If you are a US resident at the time of distribution, you can file for a refund of Swiss withholding tax by filing out a refund form and providing additional documentation that demonstrates your Pillar II was previously taxed by the US.
For your US taxes, any distributions in excess of your tax basis will be taxed at your US ordinary income tax rates. See the example below:
As you can see, it’s imperative to keep track of your employee and employer contributions each year. The higher your US tax basis in the plan, the smaller the amount of distribution from the plan that will be taxable for US purposes.
3. An annuity and lump sum
For both residents and non-residents of Switzerland, there is the option to choose a combination of annuity and lump sum distributions. Each option is taken from the same ‘pool’ of benefits, so taking one will decrease the amount available for the other option.
US Tax Reporting – Important Points
In addition to reporting your annual employer pension contributions, be sure to include your Pillar 2 account balance on Forms 114 (FBAR) and Form 8938, Statement of Specified Foreign Financial Assets.
As the US does not treat Pillar 2 as a “qualified retirement plan,” contributing to these accounts will lead to an imbalance between your US and Swiss tax reporting. In the US, all contributions and growth are taxed at the time of contribution. As these contributions are taxed in advance, you build up a tax basis (you should retain copies of your US returns to prove previously taxed pension contributions and growth) which can be used to minimize taxable income when these funds are distributed. Make sure to speak with your financial planner and US tax advisor, as optimization revolves around your unique experiences.
As Swiss employers will often offer higher contributions or supplementary plans to increase your retirement benefits, it’s important to remember the impact this can have on your US taxes.
Meet the Authors
Patrick Hoza is a Tax Director with USTAXFS and has over 27 years of experience with US individual expatriate taxation, including High Net Worth Individuals, streamline/voluntary disclosure filings and tax consulting. He has worked with large multinationals like Novartis, BP, Hewlett Packard and General Electric and has supported both US expatriates and resident and non-resident aliens with their US tax-related issues.
Much of his career was with KPMG and Ernst & Young, where he worked and lived in Russia, France and finally Switzerland. He has gained valuable working knowledge of the respective income tax regulations in these countries.
Patrick holds a B.A. in International Relations from the University of Colorado, is a member of the National Association of Enrolled Agents and is a Certified Acceptance Agent.
Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent with Connected Financial Planning. She’s spent over a decade working with US expats on US tax and financial planning issues. She is passionate about working with US expats and their families to help secure their financial future reflective of their core values. Arielle grew up in New York and has lived throughout the US, Germany and Switzerland.