FBAR Reporting for Pension Plans and Welfare Benefit Plans

FBAR Reporting for Pension Plans and Welfare Benefit Plans

Fulbright Briefing
By: Stephanie Schroepfer and Justin S. Coddington

Although requirements to file a Report of Foreign Banks and Financial Accounts ("FBAR") (Form TD-F-90-22.1) have been in effect since the early 1970s, until recently it was not generally known that the government takes the position that FBAR reports may be required to be filed for pension plans and welfare benefit plans.[1] Benefit plans, plan investment committee members, plan trustees and others who may have investment control over benefit plans may have obligations to file FBARs.[2] In many cases, the FBAR filing deadline of a person with signature authority over foreign accounts was extended until June 30, 2011.

The penalty for failure to file an FBAR (if not due to a willful failure to file) is up to $10,000 per failure.

Final FBAR Rules Issued For FBAR Reports Due June 30, 2011. The Department of Treasury and the Financial Crimes Enforcement Network (FinCEN) issued the Final Bank Secrecy Act Regulations (the "FBAR Regulations") effective March 28, 2011, that are applicable to certain legally required reports concerning foreign accounts that are due on June 30, 2011 (for the 2010 calendar year and, if applicable, prior calendar years) and for FBARs filed for calendar years after 2010.

General FBAR Filing Requirement. The FBAR Regulations generally provide that each United States Person (defined below) having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country must report the relationship to the Internal Revenue Service for each year that the relationship exists by filing an FBAR. The FBAR filing requirement applies to a United States Person if the aggregate value of the accounts in which he has a financial interest or over which he has signature or other authority exceeds $10,000 at any time during the calendar year.

Next Deadline for Filing FBAR. The next FBAR filing deadline is June 30, 2011. The granting by the Internal Revenue Service of an extension to file Federal income tax returns does not extend the due date for filing an FBAR.[3]

Types of Reportable Accounts Subject to FBAR Reporting. The following types of accounts in a foreign country may be subject to FBAR reporting:

(1) a bank account (defined as a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking, including time deposits such as certificates of deposit accounts),

(2) a securities account (defined as an account maintained with a person in the business of buying, selling, holding or trading stock or other securities), or

(3) an "other financial account" (defined as an account with a person that is in the business of accepting deposits as a financial agency, an account that is an insurance or annuity policy with a cash value, an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association, or an account with a mutual fund or similar pooled fund that issues shares available to the general public and that has a regular net asset value determination and regular redemptions).

These foreign accounts are referred to herein as "Reportable Accounts."

The FBAR Regulations contain a placeholder (marked "reserved") for an account with an "other investment fund." Until rules are issued defining the term "other investment fund," no FBAR reports will be required with respect to such accounts.

With respect to global custodial arrangements, the preamble to the FBAR Regulations indicates that FinCEN takes the position that an omnibus account under which a United States Person has the legal right to access its holdings outside of the United States only through a United States custodian bank is not a Reportable Account for which the United States Person would have to file an FBAR. If the custodial arrangement permits the United States Person to directly access its foreign holdings maintained at the foreign institution, the Person would have a Reportable Account.

For 2009 and prior calendar years, no FBARs were due by persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund other than a mutual fund.[4] This relief applied to funds such as foreign hedge funds or private equity funds.[5]

Meaning of the Term "United States Person." For purposes of the FBAR rules, the term "United States Person" generally means (1) a citizen of the United States, (2) a resident of the United States (defined as a resident alien under 26 U.S.C. 7701(b) and the regulations issued thereunder but using the definition of United States in 31 CFR 1010.100(hhh) and (3) an entity, including but not limited to a partnership, trust, or limited liability company created, organized or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States. A single member limited liability company or other entity that is a disregarded entity for United States tax purposes is treated as a United States Person.[6]

Meaning of the Term "Signature or Other Authority." Generally a United States Person has "signature or other authority" if he or it has authority (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a Reportable Account by direct communication (whether in writing or otherwise) to the person with whom the Reportable Account is maintained. Under this "direct communication" test, if, for example, an investment committee of a pension plan has no authority to communicate instructions directly to the person with whom a Reportable Account is maintained, but rather, merely has authority to communicate directions to the plan trustee, the investment committee and its members would not be considered to have signature or other authority that triggers an obligation for them to file FBARs.

Meaning of the Term "Mutual Fund." The definition of a mutual fund includes a requirement that the shares be available to the general public in addition to having a regular asset value determination and regular redemption features. Typically, hedge funds and private equity funds will not qualify as "mutual funds."

Meaning of the Term "Financial Interest." A United States Person has a "financial interest" in each Reportable Account in a foreign country for which he is the owner of record or has legal title regardless of whether the account is maintained for his own benefit or for the benefit of others. A United States Person also has a financial interest in each Reportable Account in a foreign country for which the owner of record or holder of legal title is one of the following: (1) a person acting on behalf of that United States Person, such as an attorney, agent or nominee with respect to the Reportable Account, (2) a corporation or partnership in which the United States Person owns (directly or indirectly) more than 50 percent of the voting power or the total value of the shares, or more than 50 percent of the interests in profits or capital, or any other entity (other than a trust described in clause (3) or (4)) in which the United States Person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits, (3) a trust if the United States Person is the trust grantor and has an ownership interest in the trust for United States Federal tax purposes (such as a "rabbi trust"), or (4) a trust in which the United States Person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.

Signature Authority Exemptions. Where they have no financial interests in the Reportable Accounts but rather merely have signature authority for the Reportable Accounts, officers and employees of certain entities including the following entities do not have to file FBARs with respect to Reportable Accounts of such entities: (1) a United States or foreign entity that has a class of equity securities or American depository receipts listed on any United States national securities exchange, (2) a United States subsidiary of a United States entity with a class of equity securities listed on a United States national securities exchange if the United States subsidiary is named in a consolidated FBAR report filed by the parent, or (3) a United States or foreign entity that has a class of equity securities registered under section 12(g) of the Securities Exchange Act (including American depository receipts in respect of equity securities registered under section 12(g) of the Securities Exchange Act).

For the 2010 calendar year and calendar years prior to 2010, a person who has signature authority over, but no financial interest in, a Reportable Account for which an FBAR reporting exemption does not apply will have until June 30, 2011 to file an FBAR for the Reportable Account.[7]

No Blanket Exemption for Pension Plans and Welfare Benefit Plans. The government declined to grant a blanket exemption from FBAR reporting requirements for pension plans and welfare benefit plans.[8]

Exemption for Participants and Beneficiaries in Certain Pension Plans. Participants and beneficiaries in retirement plans described in section 401(a), 403(a) or 403(b) of the Internal Revenue Code of 1986, as amended do not have to file FBAR reports for Reportable Accounts held by or on behalf of such plans. Participants and beneficiaries who are not covered by this exemption should determine whether they are exempt from FBAR filing on the basis that they do not have a "financial interest" in the Reportable Accounts.

Exemption for Certain Trust Beneficiaries. A beneficiary of a trust in which the United States Person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income does not have to file FBAR reports for Reportable Accounts held by or on behalf of such trust if the trust, the trustee of the trust or agent of the trust is a United States Person that files an FBAR disclosing the Reportable Accounts.

Person Responsible for Filing in the Case of Life Insurance. The FBAR Regulations clarify that the person responsible for filing an FBAR in the case of life insurance is the policy holder not the beneficiary.

Multiple Reports May Be Due on June 30, 2011 for a Reportable Account for Multiple Calendar Years. Technically the FBAR filing requirements have been in effect for many years but many people were unaware of the filing requirements. The Internal Revenue Service in effect granted an amnesty period for filing certain FBARs. To the extent that a United States Person with signature authority was granted an extension of time to file FBARs under Internal Revenue Service Notice 2010-23 for calendar years before 2010, the United States Person may have an obligation to file multiple FBARs for the same Reportable Account for up to six multiple calendar years.

This article was prepared by Stephanie Schroepfer (sschroepfer@fulbright.com or 713 651 5591) and Justin S. Coddington (jcoddington@fulbright.com or 713 651 8204) from Fulbright's Employee Benefits Practice Group. If you have any questions or need assistance related to these matters, please feel free to contact the above authors, John R. Allender (jallender@fulbright.com or 713 651 5664), Alan L. Aronson (aaronson@fulbright.com or 212 318 3013), Barry W. Cowan (bcowan@fulbright.com or 214 855 7187), Jay Friedman (jfriedman@fulbright.com or 210 270 7175), Andrius Kontrimas (akontrimas@fulbright.com or 713 651 5482), Stephen A. Kuntz (skuntz@fulbright.com or 713 651 5241), Mark S. Miller (mmiller@fulbright.com or 713 651 5617) or another Fulbright Employee Benefits' Practice Group attorney listed on our website.

IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s].


 

[1] This Briefing is a mere summary of certain legal issues. This Briefing does not constitute legal advice. It may be advisable to seek legal counsel concerning the specific facts involved to ascertain whether an FBAR should be filed in a given situation.

[2] FBARs may also be required to be filed in the case of foreign accounts unrelated to pension plans and welfare benefit plans.

[3] Internal Revenue Service FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) - Filing Requirements.

[4] Internal Revenue Service Notice 2010-23.

[5] Id.

[6] Internal Revenue Service FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) - Filing Requirements.

[7] Id.

[8] The government did, however, grant a blanket exemption for certain governmental plans.

 

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