In the second of our three-part series about the Swiss Pension System, we’ll examine Pillar 2: The Occupational Pension.

Understanding Swiss Pension Pillar 2 is particularly important for US expats employed in Switzerland because navigating contributions and withdrawals ideally involves significant strategy and planning.

Note: Historically, “Swiss Pillar 2” has solely referred to the second pillar in the three-part Swiss Pension System. However, legislation passed via public vote in the summer of 2023 introduced the global minimum tax, also known as Pillar 2. (1)

Swiss Pillar 2: Occupational Pension

The second pillar in the Swiss Pension System is most similar to the concept of a US 401(k) and 403(b). It is comprised of two parts:

1. Mandatory benefits (BVG-LPP): Contributions are mandatory for adults aged 25 and older employed on a Swiss work contract and earning a salary of CHF 22,050 (2024) or higher. (2) Employers are obliged to match employee contributions and may choose to contribute more.
2. Voluntary benefits: For those who are self-employed, you may choose to make voluntary contributions. If you choose to make these contributions, you must contribute both the employer and employee portions.

Contributions to Pillar 2

The amount you contribute to Pillar 2 is age-dependent:

Swiss law requires the employer to pay at least 50% of the contributions

US expats should be aware that Swiss employers often offer higher contributions or supplementary plans to increase retirement benefits. However, this commonplace offer may have an adverse cross-border tax effect i.e., US tax complications may increase.

Taxation During Contribution Years

In Switzerland, an individual’s Pillar 2 contributions are not taxed at the time of contribution. Instead, they are subject to taxation upon drawing distributions (when you retire).

Understanding Swiss Pillar 2 in the context of the US-Swiss Tax Treaty

The US-Swiss Tax Treaty does not include a provision recognizing Pillar 2 benefits as “qualified retirement plans.” This is unfortunate for US expats living and working in Switzerland because Pillar 2 benefits thus receive unfavorable tax treatment by the US.

What this looks like in practice is that when your employer makes contributions, they are immediately considered vested. This consideration results in:

• no tax deduction for your contributions and
• yearly taxable income from your employer’s contributions.

Let’s look at an example calculating taxable compensation in Switzerland and the US: 

In the above example, you can begin to see the difference in calculating your taxable compensation in Switzerland and the US.

Switzerland reduces your gross salary by your Pillar 1 and Pillar 2 contributions. On the other hand, the US adds your employer contributions to your gross salary.

While your initial gross salary is the same, there is a 30,300 difference in taxable compensation, with higher exposure on the US side.

Taxation During Distribution Years

Upon leaving or choosing to retire in Switzerland, there are three options for receiving Pillar 2 benefits:

1. An annuity

For residents of Switzerland, annuities will be taxed at your ordinary income tax rates. Any Swiss tax paid can then be used as foreign tax credits on your US tax return.

For non-residents of Switzerland, annuities will only face Swiss taxation if there is no income tax treaty in place with your resident country or the treaty grants the taxation right to Switzerland.

Note: If you are living in the US, this does not apply, as the US-Swiss tax treaty grants taxation rights to the US in this case.

Additionally, there are exceptions to the above, which can apply if your Pillar 2 funds are from public services.

For your US taxes, since your contributions were already taxed, you can recover a portion of that tax basis with each distribution. Any amount that exceeds your tax basis will be taxed at your US ordinary income tax rates. You can then use any Swiss taxes paid as foreign tax credits. See the example below.

2. A lump sum

For residents of Switzerland, lump sum distributions receive extremely favorable tax rates. These vary depending on the location of tax residency upon distribution but are typically between 4-15%.

For non-residents of Switzerland, lump sum tax rates are applied. If you are a US resident at the time of distribution, the amount of Swiss taxes withheld will be refundable.

For your US taxes, any distributions in excess of your tax basis will be taxed at your US ordinary income tax rates.

As you can see, it’s imperative to keep track of your employee and employer contributions each year. When you retire, you are then able to use that tax basis to decrease your taxable compensation. See example below. 

3. An annuity and lump sum

For both residents and non-residents of Switzerland, you have the option to choose a combination of annuity and lump sum distributions. Each option is taken from the same ‘pool’ of benefits, so taking one will decrease the amount available for the other option.

Career Change Rollovers

When changing from one Swiss employer to another, your total Pillar 2 benefits are rolled over into a new pension account with your current employer. As long as your Pillar 2 contributions have been correctly reported up to this point, this rollover should not result in any additional taxable income.

When taking a career break, your total Pillar 2 benefits will likely be transferred from your prior account into a blocked account. Americans are often required to keep this amount as a cash balance, as most investment options result in US punitive taxes.

In recent years, the Swiss digital pension platform VIAC has provided low-cost investment options that may be attractive to Americans. However, it is always best to check with your financial planner or US tax advisor before committing to a new investment strategy.

US Tax Reporting – Important Points

In addition to reporting your annual employer pension contributions, make sure to include your Pillar 2 account balance on Form 8938, Statement of Specified Foreign Financial Assets. (3)

Wrapping up Swiss Pillar 2

The US does not treat Pillar 2 as a “qualified retirement plan.”

As such, contributing to these accounts will lead to an imbalance between your US and Swiss tax reporting.

In the US, all contributions are taxed at the time of contribution. As these contributions are taxed in advance, you build up a tax basis that can be used to minimize taxable income when these funds are distributed.

Make sure to speak with your financial planner and US tax advisor, as optimization revolves around your unique experiences.

References

1. It’s official: Switzerland to implement Pillar 2 in a gradual approach
2. Pension Scheme (2nd Pillar Benefits)
3. About Form 8938, Statement of Specified Foreign Financial Assets

Additional resources

• Switzerland - Tax Treaty Documents
• Voluntary pension contributions: Should you pay into the second pillar or Pillar 3a? 

Meet the Author

Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent with Connected Financial Planning. She’s spent over a decade working with US expats on US tax and financial planning issues. She is passionate about working with US expats and their families to help secure their financial future reflective of their core values. Arielle grew up in New York and has lived throughout the US, Germany, and Switzerland.