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International Tax Update: What is the Swiss 3 Pillar System?

April 14, 2022

Did you recently move from the U.S. to Switzerland? The Swiss Pillar System is something you should familiarize yourself with. It will help guarantee financial security.

The purpose of the Swiss pillar retirement system is to guarantee financial security for anyone living and working in Switzerland. Switzerland’s retirement system consists of three pillars: state, employer, and private benefits.

What U.S. Taxpayers Need to Know:

  • Swiss pensions do not meet the U.S. definition of a qualified retirement plan and are therefore reported as income on the U.S. tax return
  • Voluntary contributions made in Pillar III are not recommended for U.S. taxpayers living in Switzerland
  • A certificate of coverage can be used to exempt a taxpayer from making social security contributions

Pillar I contains state provided benefits. Like U.S. Social Security, these benefits include AVS/AI or AHV/IV (old-age and survivors’ insurance), unemployment, and maternity among various others. Contributing to the Swiss AVS/AHV is mandatory for all individuals employed by a Swiss entity unless there is a certificate of coverage*, which is proof of an exemption from social security contributions. US taxpayers who contribute to the Swiss social security system for the required minimum amount of time may be eligible for Swiss social security payments upon retirement, even if they have left Switzerland.

Pillar II consists of occupational benefits such as LPP/BVG (law on occupational pension schemes) and LAA/LAAC (accident insurance) and is comparable to a 401k account. These benefits are also mandatory for all individuals employed by a Swiss entity unless there is a certificate of coverage. These benefits may need to be withdrawn or transferred to a ‘blocked’ account if an individual changes employer, retires, or leaves Switzerland.

Do Swiss Pillar IIs meet the definition of a qualified retirement plan?

US taxpayers contributing to a Swiss Pillar II are often surprised to find out that Swiss Pillar IIs are non-qualified retirement accounts for US tax purposes. Swiss pensions do not meet the US definition of a qualified retirement plan. This means that employee and employer contributions, and potentially the accrued income, will be reported as income on the US tax return. Pillar II pensions are taxable if they are both vested (secured in the possession of or assigned to a person) and funded (provide with money for a particular purpose.) Tracking the amounts that are included in US taxable income is important as it creates a tax basis in the plan.

Pillar III consists entirely of voluntary contributions from an individual into their retirement benefits and is comparable to an IRA account. It consists of 3A (long-term plan) and 3B (time-flexible plan). Pillar III accounts are often not recommended for US taxpayers living in Switzerland. Since these accounts are solely funded by the individual, they may not be exempt from complex foreign grantor trust and PFIC reporting requirements. They also lower the individuals foreign tax credit which may mean the taxpayer owes more US tax.

* A certificate of coverage issued by one country serves as proof of exemption from social security contributions on the same earnings in the other country.

Want more information about Swiss Social Security, occupational, and privately funded pensions? International Tax Services is here to help.

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