Taxation of payments from a US 401(k) pension plan

The 401(k) pension plan is a company pension scheme in the US in which employees and employers pay tax-advantaged contributions into a funded pension plan. The funds are accumulated in a trust and are generally tax-free in the US during the savings phase. Subsequent payouts as a lump sum or as a pension are therefore generally taxable in the US. If an employee who has been temporarily employed in the US returns to Germany, the question arises as to how corresponding payments from a 401(k) pension plan are to be treated for tax purposes in Germany. The German Federal Fiscal Court (Bundesfinanzhof; BFH) comments on this in its decision of June 25, 2025, case no. X R 23/22.

From 1999 to 2007, a German employee born in 1953 was employed in the US and had taken out a US 401(k) pension plan during this period. The amounts invested in this plan, as well as the income attributable to them, were to be paid out at the earliest upon reaching the retirement age in the USA of 59.5 years. In 2015, he received a payment from the 401(k) pension plan, the exact tax classification of which was controversial in the context of payments from occupational pension schemes under Section 22 No. 5 of the German Income Tax Act (Einkommensteuergesetz; EStG), but was decisive due to different tax bases. While the employee treated the payment as tax-free in his income tax return, the tax office based its calculation on the difference between the insurance benefit and the total contributions paid into it. The tax court, in turn, considered half of the difference to be taxable. The BFH considered the appeal lodged by the tax office to be justified and referred the matter back to the tax court for further hearing and decision.

Benefits from insurance contracts, pension funds, pension schemes, and direct insurance policies that are not paid in the form of a life-long pension are either fully deferred or, under certain conditions, taxed on the difference between the insurance benefit and the total contributions paid into the scheme.

Full deferred taxation must be applied if the contributions were tax-privileged during the savings phase, e.g., through tax exemption, special expense deductions, or allowances. However, there was no corresponding legal basis for this in the disputed year 2015. Only with the new regulation introduced by the Annual Tax Act 2024 are certain contributions to foreign pension schemes also to be included. This is to be applied for the first time for the 2025 assessment period and was therefore not relevant in the case in dispute.

With regard to the specific application of the various alternatives for other income under Section 22 No. 5 EStG, the BFH considered the 401(k) pension plan to be comparable to the expressly mentioned and, in this respect, equivalent implementation methods of occupational pension schemes (pension funds, pension schemes, and direct insurance) on the basis of a comparative legal assessment. Accordingly, in the disputed year 2015, the conditions for taxation of the difference between the payout and the contributions paid in (Section 22 No. 5 sentence 2 letter b) EStG) were also met in principle for a US 401(k) pension plan.

On this basis, a distinction had to be made: if the underlying contract was concluded before January 1, 2005, the capital payment was made after twelve years, and the requirements for setting up a funded pension plan were met, the payment is tax-free. This is likely what the employee was referring to in the dispute, as he claimed that the 401(k) pension plan was concluded in 1999. If the contract was concluded after December 31, 2004, the age and term at the time of payment are irrelevant and therefore the difference between the insurance benefit and the total contributions paid into it is taxable. This was the position taken by the tax office, as in its opinion it was not clear when exactly the 401(k) pension plan was concluded and a date after December 31, 2004, was also conceivable. The tax court has to make further findings on these factual aspects (date of conclusion and specific structure of the 401(k) pension plan), which is why the case was referred back for further hearing and decision.