The Swiss pension system is comprised of three basic levels of pensions, and each one has various tax-reporting requirements for expats. But what many expats don’t know is that sometimes you can be refunded for your contributions if you are not staying in Switzerland long-term. Find out how to get the most out of the available Swiss pension options for expats, and if you are eligible to receive your pension contributions back.
State Pensions in Switzerland
The first stop on our tour of the Swiss pension system for expats is the state pension. In Switzerland, you’ll see this pension option listed as Alters-und Hinterlassenenversicherung (AHV) in German, but since a multitude of languages are spoken in Switzerland, look for the abbreviation AVS for the French and Italian variations. The state pensions are mandatory, and they intend to cover the basic living expenses of those retiring in Switzerland. The system is of the pay-as-you-go variety, and it’s funded by contributions from employees and employers, from the self-employed, and from the people not engaged in paid employment at varying rates.
Now for some good news: you don’t have to report the contributions on your US tax return. Keep in mind that payments and distributions of the state pensions are considered taxable income in both countries, but you can use the foreign tax credit to eliminate double taxation.
With these plans, your monthly distributions from the Swiss pension system will have taxable and nontaxable components. The nontaxable part is comprised of your contributions that haven’t been deducted from taxable income.
Swiss Occupational Pensions
Occupational pension plans in Switzerland are funded pension plans that are mandatory for employees. Both employees and employers fund these plans. The employer’s contribution amount must be, at a minimum, equal to the employees’ contribution amounts. Self-employed individuals can opt into these pension plans if they choose.
If you contribute to Swiss social security programs by withholding an amount on your paycheck or from self-employment income, don’t plan on these contributions being tax-deductible. They also do not qualify for use with the Foreign Earned Income Exclusion. The contributions made by your employer are added to your gross wages and are considered taxable earned income. However, you can use the foreign tax credit to avoid double taxation on these contributions.
As with the state pensions, the distributions of benefits are partially taxable. The nontaxable part is the contributions that you didn’t deduct from US income. But the employer contributions reported on your US income tax return will be nontaxable.
In the absence of a non-discrimination clause, US expats who earn income from this category of the Swiss pension system must include it as taxable income. Also, keep in mind that if you meet the thresholds, you may have an FBAR (Foreign Bank Account Report) or FATCA From 8938 reporting requirement.
Private Pensions in Switzerland
The final category of Swiss pension system is a tax-deductible pension plan available to gainfully employed persons on a voluntary basis. There are two types of private pensions, 3a and 3b. 3a schemes typically are taxed less and are subject to regulations, but 3b schemes are not regulated and do not come with tax benefits.
Distributions from this type of pension accounts are considered investment income. The IRS basically considers the contributions made as being post-tax, meaning the account growth, and nothing else, is subject to tax. Remember, contributions are not deductible against your US income.
These private pension schemes are not considered qualified plans under US regulations because they are not structured to conform to the complex rules that would make them tax-deductible. Basically, plan on including the value of your vested accrued benefit as part of your gross annual income for tax purposes. Further, if you meet the thresholds, you may have an additional FBAR (Foreign Bank Account Reporting) or FATCA Form 8938 reporting obligation.
Getting Your Contributions Back from the Swiss Pension System
If you are preparing to leave Switzerland permanently, you should verify your employer’s and your own payments into your individual OASI/DI account before leaving Switzerland.
The US has a social security agreement in place with Switzerland, which helps prevent double taxation as far as social security programs. The agreement helps spell out where the payments should go so that expats don’t have to pay twice for one benefit. Further, the social security agreements mean that the pensions from the OASI/DI are also paid abroad, as a rule. For this reason, you cannot generally apply for any reimbursement of your accumulated OASI contributions when leaving Switzerland.
The occupational pension scheme is a bit different. If you are leaving Switzerland definitively and relocating to a state outside of the EU/EFTA, you can choose whether to apply for payment of your accumulated capital (terminating your benefit); or maintain the pension fund institution cover.