German Pension Options for Expats—and How to Report Them

Expats who live in Germany have three basic options—called pillars—for pensions. Each pension scheme has various advantages but, more importantly, is reported differently on your US expat taxes. Find out what you can expect come tax time from the German pension options for expats.

Mandatory State Pension in Germany

In Germany, this is the public retirement insurance scheme, or Gesetzliche Rentenversicherung (GRV). As you might have guessed, contributing to this pension is mandatory. Government subsidies, employers, and employees fund this pension. The employees pay into this through German social security contributions with a percentage of their salary.

During contribution years, there is no US tax-reporting requirement. Keep in mind that German social security payments are taxable in the country of residence per the US-Germany treaty for US person and non-resident aliens. Pensions paid to US citizens or Green Card holders residing in Germany are taxable in both countries, so you’ll want to factor that in when tax planning.

Fortunately, the cost of double taxation can be eliminated. The taxes you pay for German pension income received can be used as a foreign tax credit against the same income on your US expat taxes.

German Company and Occupational Pensions

The next on our list of German pension options for expats is a voluntary pension scheme that employers can offer to their employees to augment their retirement savings. In Germany, you’ll see these pensions referred to as betriebliche Altersvorsorge (bAV). These pension plans come in different forms, including:

• Direct pension promise. This pension scheme is when an employer agrees to pay the employee a specific amount upon retirement.
• External pension plans. This happens when the employer uses a plan via an external provider. Examples include life insurance, independent employee pension providers, independent pension funds, and support funds. 

If your employer offers one of these pension options, look for clear advantages over the state pension, such as early payment of a pension. Some will have them; others may not.

Germany follows the US retirement plan treatment per the treaty on employer pension. But foreign retirement plans are considered employer-sponsored plans.

Private German Pensions

Private pensions in Germany are individual pension investment plans arranged via banks and insurance providers to help boost your retirement income, and these plans are used by individuals with private pension providers. A couple of examples of these private pensions include:

• Riester Pension Plan – The Riester is a life annuity plan, and the government contributes annual subsidizations to these plans. A minimum of 4% yearly gross income is paid into the Riester pension plan, with a maximum of €2,100 annually, so this plan is appropriate for low-income earners. Keep in mind that these pension benefits are taxable.
• Rürup or Basic Pension Plan – This plan is intended for self-employed and freelance workers, is more flexible, and is also attractive to high earners. Expats in Germany can pay a maximum of €23,712 annually into the basic pension plan. The maximum amount is doubled for couples, and 86% of contributions offset taxes (this is set to change to 100% by 2025).

Above, we discussed the subsidized schemes. But there are also German pension options for expats that are fund-based, flexible, and can be used in tandem with subsidized schemes. However, those are not qualified plans according to US tax regulations since they do not comply with the complex rules for qualification. American expats who use these plans will be required to include the value in gross income of their vested accrued benefit under the plan at the end of each tax year.

When it comes down to it, the structure of your foreign pension determines if it is treated as a foreign grantor trust. The determining factor is control, but it is difficult to understand precisely what kind of control leads to this determination. Typically, the power to make decisions on the actual investments in a foreign pension is considered control and makes it a foreign grantor trust even if you don’t exercise control over it. The ability to make such decisions is enough. This may trigger involved tax-reporting obligations, including filing Form 3520 and reporting underlying investments as PFICs on Form 8621.

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