The Swiss employee pension plan (known as the 2nd pillar pension), is, from a US tax perspective, a funded non-qualified foreign pension plan.  As such, contributions employees make to the plan are non-deductible from a US perspective and the company contributions to employee plans are considered taxable wages. We include the growth in the plan as taxable income on a yearly basis. However, it is possible, in very limited circumstances, that the growth is not taxable. But obtaining the information to make that determination would likely be impossible. As well, the cost of obtaining the information to make the determination would out-weigh the possible savings.

As an aside, keep in mind that the includable income related to the company contribution to the pension plan is not eligible for the “foreign earned income exclusion” (reported on Form 2555).

While the income inclusion and the out of pocket tax cost on the pension may seem draconian, keep in mind that a tax basis is being created from a US perspective in the pension plan.  When the pension is withdrawn, part or all of the distribution will be non-taxable due to the tax basis you have built up in the plan. Depending on various factors (including exchange rates), it is possible that paying current US tax on the pension contributions could result in a lower overall tax on the pension at the end of the day than would otherwise be the case if you were not required to pay tax on a current basis.

Finally, please note that there is always the possibility the IRS could question your basis in a foreign pension plan upon distribution. Therefore, we recommend retaining a copy of all tax returns that show the inclusion of company contributions and the non-deduction of employee contributions to the plan in perpetuity to justify your US tax basis in the foreign pension plan.

If you need assistance with your pensions, please contact one of our tax specialists in Switzerland.