Benefit Plans with Foreign Financial Accounts Must File FBAR Reports

The Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) issued final regulations on February. 24, 2011, governing Reporting on Foreign Financial Accounts (FBAR). The final regulations will be effective for the 2010 FBAR filings that are due June 30, 2011, and any FBAR filing that was deferred pursuant to IRS Notices 2009-62 and 2010-23.

Though the final regulations have made certain clarifications that are beneficial to employee benefit plan sponsors, they do not exempt all foreign accounts related to tax qualified retirement plans or other employee benefit plans from the FBAR requirements.

The FBAR regulations apply to every United States person who has a financial interest in, or signature authority over, any foreign financial accounts that have an aggregate value exceeding $10,000 at any time during a calendar year. Persons who fall in this category must file an FBAR report on or before June 30th of the following year.

United States Persons

United States persons include:

• Citizens of the United States;
• Residents of the United States; and
• Entities, including but not limited to, corporations, partnerships, trusts or limited liability companies, that are created, organized or formed under U.S. laws.

Employee benefit plans may fall in the third category.

As under the proposed regulations, the final FBAR requirements do not apply to either:

• Participants and their beneficiaries in plans that meet the tax qualification requirements of Code Sections 401(a), 403(a), or 403(b); or
• Owners and beneficiaries of individual retirement accounts under Code Sections 408 or 408A.

Financial Interest

The final regulations state that a United States person has a financial interest in a foreign bank, securities or other financial account if:

• The United States person is the owner of record or has legal title to the account, regardless of whether the account is maintained for himself or others;
• Any person acts as an agent, nominee, attorney or in some other capacity on behalf of a United States person with respect to the account;
• The account is held by a corporation in which the United States person owns, directly or indirectly, more than 50% of the total voting power or the total value of the shares;
• The account is held by a partnership in which the United States person owns, directly or indirectly, more than 50% of the interest in profits or capital;
• Any other entity holds the account and such entity is owned, either directly or indirectly by a United States person who has more than 50% of the voting power, total value of the equity interest or assets, or interest in profits;
• A trust, of which a United States person is the trust grantor and has an ownership interest in the trust for federal tax purposes, maintains the account; or
• The account is held by a trust in which a United States person either has a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income.

The final regulations narrow the concept of “financial interest in a bank, securities or other financial account in a foreign country” to exclude persons who establish trusts and subsequently appoint one or more trust protectors. Therefore, a plan sponsor that establishes a trust to hold tax qualified plan assets does not automatically have a financial interest in the accounts if the sponsor appointments of a committee to monitor and/or replace the trustee. In such a circumstance, the committee should review whether it has signature authority, as discussed below, and whether it is required to make FBAR filings.

Signature Authority

In a significant change for benefit plans, FinCEN also limited the scope of the persons who are deemed to have “signature or other authority” over foreign accounts to those who have the ability to control the disposition of assets in the foreign account by direct communication with the person who maintains the account. The preamble to the final regulations states that the test for determining whether a United States person has signature authority over an account is:

Therefore, members of a retirement plan committee who do not have such authority will not be required to indicate on their personal tax returns that they have a relationship to a foreign financial account and need not complete a FBAR filing. However, the filing requirements will apply to the committee members who are able to direct the disposition of assets or who have a financial interest in the trust, as described above.

Reportable Foreign Financial Accounts

The final regulations also broadly define types of reportable accounts to include bank accounts, securities accounts, mutual fund or pooled accounts, and a catch-all of “other financial accounts” that is designed to include other similar deposit, insurance and brokerage accounts.

The preamble to the final regulations clarifies that a United States person who cannot directly access the foreign financial account will not have to file FBAR reports with respect to such an account. Therefore, United States persons who maintain foreign accounts that are controlled by intermediaries or custodians with direct access to the funds do not trigger FBAR responsibilities. This could include the sponsor of an employee benefit plan trust where a financial institution serving as trustee maintains a foreign account for the trust.

As a result of the issuance of the FBAR final regulations, sponsors of employee benefit plans with assets held in foreign accounts should carefully review the final regulations to make sure they comply with the FBAR filing requirements.