How do 401k posts work

Taxation on the US retirement plan payout

The payout from the US 401 (k) pension plan is subject to domestic taxation only in the amount of the difference between the benefit and the sum of the contributions paid on it.

background

In the US, old-age provision is largely the responsibility of the individual employee. However, there are tax-subsidized programs that allow employers to contribute to retirement provision.

One of these programs is the 401 (k) plans. These are investment plans that allow employees to invest part of their salaries in mutual funds from other companies. Payments into a 401 (k) plan are tax-privileged for the employee in the form in which the investment amount can be deducted from the respective taxable income. For the companies, the payments are also tax-deductible as additional services.

facts

The dispute was how the amounts paid to the taxpayer in 2011 from a US pension plan are to be treated in the income tax assessment of the spouses.

The taxpayer born in 1971, who is assessed for income tax together with his wife, is a German citizen. He worked in the USA from 2005 to 2011 on behalf of his German employer.

During the posting period, the taxpayers had given up their domestic residence and their sole residence in the United States. The US employer made it possible for the taxpayer to participate in a US retirement plan called the 401 (k) pension plan.

In mid-2011, the taxpayers from the USA returned to Germany and established their place of residence here. From August 2011, the taxpayer was then working on behalf of his employer in France. He retained his domestic residence during this posting to France.

The FA was of the opinion that since the payments into the 401 (k) pension plan had been made after January 1, 2008, these payments were deemed to have benefited from Section 3 No. 63 of the Income Tax Act. The taxation of the disbursement amounts is therefore based on § 22 No. 5 sentence 1 EStG with the consequence that the deduction of previous payments is not possible.

decision

The action brought by the taxpayers was successful. The FG decided that the payment is subject to domestic taxation only in the amount of the difference between the benefit and the sum of the contributions paid on it.

According to § 22 No. 5 sentence 1 EStG, other income also includes benefits from retirement plans, pension funds, pension funds and direct insurance. The term “benefits” also extends to (partial) capital payments and, in economic terms, includes the earlier contributions, allowances and income generated in the payment amount.

According to its open wording, the regulation does not contain any restrictions on payments from domestic plans and institutions of the above-mentioned. Art. However, based on a comparative legal qualification, the foreign pension fund or other institution must be comparable to the coverage provided by a domestic institution in terms of its structure and the benefits to be provided by it in the event of a pension. The FG has approved the revision, which has since been filed by the FA.

Reference
FG Cologne 9.8.18, 11 K 2738/14, Rev. BFH X R 29/18