Expats who live in Singapore will want to know about CPFs, otherwise known as Central Provident Funds. These funds comprise the Singaporean social security program that allows working Singapore citizens as well as permanent residents to save money for retirement. Other portions of the Central Provident Fund focus on social programs like healthcare, owning a home, protection for families, and asset development; so, the benefits are many. But, expats need to know how the IRS treats Central Provident Funds so they can start their tax planning.
The Various Central Provident Fund Accounts
In Singapore, the employee, as well as the employer, makes CPF contributions each month. There are four accounts these can go into. The first is an ordinary account, which includes housing, insurance, investment, and education. Next up is the special account, which covers old age and anything retirement-related. The third type of Central Provident Fund account is the MediSave account, which helps with hospital and medical expenses. Lastly, when a Singapore resident or permanent citizen turns 55, a fourth retirement account is additionally created.
How the IRS Treats CPF Funds
CPF is not a US qualified fund like a 401(k), which is the most comparable American fund. So, for expats in Singapore, the contributions aren’t tax-deductible. There is no US-Singapore tax treaty, which would have effectively allowed US qualifying fund treatment for CPF. Keep in mind that the IRS considers the contributions made by the employer to the CPF to be part of the annual compensation.
Central Provident Fund contributions are not considered qualifying income for the Foreign Earned Income Exclusion, so you won’t be able to use that exclusion for CPF income. But, you can use a Foreign Tax Credit as a dollar for dollar credit against taxes already paid to potentially eliminate the US tax on the income. Keep in mind that any income earned from interest is taxable when you get a distribution from the fund.
Generally, in these types of situations, unless the employee has contributed more to the fund than the employer or is considered a highly compensated employee, reporting a CPF as a foreign trust may not be required. What expats in Singapore will want to avoid is any foreign pension begin treated as a foreign grantor trust, which would trigger one of the most daunting expat requirements: Form 3520. The contributions (and growth) taxed on American tax returns is your US basis in the fund, but at the time of distribution, this basis is not taxable on the US return.
And, keep in mind that these pensions can trigger other filing requirements as well, in the form of FBAR (Foreign Bank Account Reporting) and FATCA Form 8938.
FBAR regulations are not as clear as they used to be about reporting of foreign pension plans. You should decide whether to report your CPF on your Foreign Bank Account Report with a specialized tax accountant, as the regulations are not as clear as they could be. However, as a foreign grantor trust, CPF does need to be reported on the FBAR. It’s usually best to err on the side of cautiousness and report your CPF on the FBAR, even in instances when it is an employee benefits trust.