As the second of a three-part series, this article will dive into the first pillar of the Swiss pension system. See Pillar 1 and Pillar 3.
Pillar 2: Occupational Pension
Most similar to the concept of a US 401(k) and 403(b), the second pillar of the Swiss Pension System is comprised of two parts:
1. Mandatory benefits (BVG-LPP)
For those who work under an employer and are 25 years old or older with a salary of 21,510 CHF (2022) or higher, Pillar 2 contributions are mandatory. Your employer must at least match your contributions but 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
The amount you contribute to Pillar 2 is age-dependent:
1. 25 to 34 years old: 7%
2. 35 to 44 years old: 10%
3. 45 to 54 years old: 15%
4. 55 to 64 years (for women) or 65 (for men): 18%
As Swiss employers will often offer higher contributions or supplementary plans to increase your retirement benefits, it’s important to keep in mind the impact this can have on your US taxes.
Taxation During Contribution Years
In Switzerland, your portion of the Pillar 2 contributions (based on the percentages above) are not taxed when contributed. Rather, when you retire or start receiving distributions, they will be subject to taxation.
The US-Swiss Tax Treaty does not include a tax treaty to recognize Pillar 2 benefits as “qualified retirement plans”, as would be the case with a US 401(k) or 403(b).
In the US, as these Pillar 2 benefits are not considered qualified, they have a more unfavorable tax treatment. When your employer makes contributions, they are immediately considered vested. This results in no tax deduction for your contributions and yearly taxable income from your employer’s contributions. See the example below:
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, while 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.
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 you pay 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. 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.
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 example below:
2. A lump sum
For residents of Switzerland, lump sum distributions receive extremely favorable tax rates that very depending on the location of tax residency upon distribution. You can expect a rate 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. See example below:
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.
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, 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.
Summary
As the US does not treat Pillar 2 as a “qualified retirement plan,” 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 which 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.
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.
Resources/References
IRS - US-Switzerland Tax Treaty Documents:
https://www.irs.gov/businesses/international-businesses/switzerland-tax-treaty-documents
AXA - Pillar 2:
https://www.axa.ch/en/pension/pillar-2.html
VIAC:
https://viac.ch/en/vested-benefits/
bsv.admin.ch - Meaning and objectives of occupational pension funds:
https://www.bsv.admin.ch/bsv/en/home/social-insurance/bv/grundlagen-und-gesetze/grundlagen/sinn-und-zweck.html
KPMG - US Tax Implications (2021):
https://www.pensionskassen-novartis.ch/fileadmin/pkn/Praesentationen/2021/Pension_-_US_persons_-_Novartis_-_2021.pdf
SwissLife – Current conditions and key figures for employee benefits:
https://www.swisslife.ch/content/dam/ch/dokumente/en/unternehmen/nvs/vorsorge/web0762_konditionen_slbp_en.pdf