Israel

Tax-deferred employer plans

Israeli employer-sponsored retirement vehicles include pension funds (keren pensia, both "new" comprehensive pensions and older funds), provident funds (kupat gemel), and bituach menahalim (managers' insurance). Employers are required by Israeli law to provide pension contributions for employees. The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do.

Pension funds (keren pensia): These are pooled defined contribution or hybrid plans managed by licensed pension companies (Menora, Migdal, Harel, etc.). Both employer and employee contribute (typically 6%+ each).

§301.7701-7 classification: Foreign trust. Israeli pension funds are trusts under Israeli law, supervised by the Capital Market Authority (CMISA), and controlled by Israeli pension companies. Failing either the court test or the control test makes a trust foreign; Israeli pension funds fail both.

Rev. Proc. 2020-17 analysis: Pension funds are tax-favored in Israel, regulated by CMISA, broadly available to employees (mandatory pension since 2008), and nondiscriminatory. Large pension funds broadly satisfy the nondiscrimination and tax-favored conditions of Rev. Proc. 2020-17. These plans likely qualify for the exemption.

Bituach menahalim: Managers' insurance is an insurance contract with a licensed insurer, not a trust on its face; whether its savings component is a foreign trust for U.S. purposes is unsettled, as with French assurance vie. Many practitioners report it protectively. The risk-premium component (life and disability cover) is not part of any reportable savings balance.

For large bituach menahalim schemes pooled across many policyholders, the Rev. Proc. 2020-17 analysis parallels the pension fund analysis. If the insurance company manages a pooled fund as part of a nondiscriminatory employer plan meeting all Section 5.03 conditions, the plan may qualify.

Treaty provisions: The U.S.–Israel treaty does not contain a comprehensive pension deferral article comparable to the U.S.–Canada or U.S.–UK treaties. There is no mechanism to elect deferral of U.S. tax on fund earnings. This does not affect the separate Rev. Proc. 2020-17 reporting exemption, which does not require a treaty.

3520/3520-A treatment: If the plan qualifies under Rev. Proc. 2020-17, no forms are required. Otherwise, file Form 3520-A and Form 3520 Part II annually for the part of each fund your own contributions pay for, once your own contributions to it exceed the employer’s, counted as the note at the end of this section explains (Treas. Reg. §1.402(b)-1(b)(6)), or for any part you otherwise own. Distributions (lump sum, monthly pension, early withdrawal) go on Part III unless reported as compensation income (see the note at the end of this section).

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Tax-deferred individual plans

Keren hishtalmut (advanced training fund) is an Israeli savings vehicle originally designed for continuing education but widely used as a general savings and investment account. Where an employment contract or collective agreement provides for it (public service, teachers, and several unionized sectors), the employer typically contributes 7.5% and the employee 2.5% of salary, up to a ceiling; contributions are not mandatory for all employers. Withdrawals are tax-free in Israel once six years have passed from the first deposit (three years for members who have reached retirement age, or for withdrawals used for study).

§301.7701-7 classification: Foreign trust. Keren hishtalmut funds are trust arrangements under Israeli law.

Rev. Proc. 2020-17 analysis: Keren hishtalmut is arguably not a "retirement trust" under Rev. Proc. 2020-17 §5.03: it is a general savings/education fund, not operated exclusively (or almost exclusively) to provide pension or retirement benefits, and withdrawals are not conditioned on retirement age, disability, or death. This is likely to disqualify it regardless of the fund's size or nondiscrimination profile. The classification is uncertain.

Treaty provisions: No deferral. The U.S. does not recognize the Israeli tax exemption on keren hishtalmut withdrawals.

3520/3520-A treatment: Given the uncertain Rev. Proc. 2020-17 status, the conservative approach is full reporting. File Form 3520-A and Form 3520 Part II annually. Each keren hishtalmut requires its own 3520-A, separate from any pension fund.

Because the holding period incentivizes leaving funds invested, many U.S. persons accumulate significant balances and significant unfiled years.

Gifts and inheritances

Israel is a common source country for gifts and inheritances received by U.S. persons, particularly among the large dual-citizen community. If a U.S. person receives more than $100,000 in gifts or bequests in a year from one nonresident alien individual or foreign estate (adding together gifts from donors related to each other), Form 3520 Part IV reporting is required. Gifts from foreign corporations or foreign partnerships exceeding $20,573 (for 2026, indexed for inflation) are also reportable.

Israel abolished estate tax in 1981 and imposes no gift or inheritance tax, though capital gains tax can apply when inherited or gifted assets are later sold. The U.S. obligation is purely informational. Common scenarios include gifts from parents for a home purchase, inheritance of Israeli property and bank accounts, and gifts of securities.

Penalties and practical notes

It is common for a U.S. person working in Israel to have three or more separate funds (pension, keren hishtalmut, bituach menahalim). Each one that must be reported needs its own 3520-A. The aggregate penalty exposure for non-filing is substantial.

The Israeli tax year is the calendar year, aligning with the U.S. No fiscal year conversion is needed.

Israeli employers provide an annual summary (tofes 106) with contribution and balance data. Pension companies issue annual statements. Keren hishtalmut fund managers issue annual statements showing contributions, returns, and balances.

For the 3520-A income statement: report employer and employee contributions, investment returns, insurance premiums deducted (for bituach menahalim), management fees, and any government grants. The balance sheet reports the opening and closing account value.

Convert Israeli new shekels at the rate prevailing when each amount is received, paid, or accrued; the IRS has no official exchange rate and generally accepts any posted rate used consistently, so its published yearly average rate is a common choice for amounts arising evenly across the year.