Japan

Tax-deferred employer plans

Japanese corporate pension plans come in several forms:

Defined Benefit Corporate Pension (kakutei kyufu kigyou nenkin): The employer promises a specific benefit at retirement. Plan assets are segregated in a trust or fund managed by trust banks or life insurers.

§301.7701-7 classification: Likely a foreign trust. DB plans hold segregated assets under Japanese law, supervised by the Ministry of Health, Labour and Welfare (MHLW). Failing either test makes a trust foreign; these fail both.

Defined Contribution Corporate Pension (kigyou-gata kakutei kyoshutsu nenkin): Similar to a U.S. 401(k). The employer and sometimes employee contribute to individual accounts invested in funds chosen by the member. Assets held in trust.

§301.7701-7 classification: Likely a foreign trust. Funded, segregated, supervised by MHLW.

Rev. Proc. 2020-17 analysis: Whether a corporate DB or DC plan qualifies under Rev. Proc. 2020-17 depends on meeting all §5.03 conditions: the plan must be tax-favored, subject to annual information reporting to the tax authority, funded only from earned-income contributions with annual caps, restricted to withdrawal at retirement, disability, or death, and, for employer-maintained plans, satisfy the §5.03(6) nondiscrimination test.

For corporate DC plans, each employee has an individual account, but the plan-level analysis matters: if the DC plan satisfies all §5.03 conditions, including the §5.03(6) nondiscrimination test for employer-maintained plans, it may qualify. 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.

Employees' Pension Funds (kosei nenkin kikin): Older structures, mostly wound down or converted to DB plans. If vested benefits remain, the same analysis applies.

Treaty provisions: The treaty has no provision deferring tax on plan earnings. Article 17(1) makes pensions, including social security, taxable only in the residence State, but the saving clause (Article 1(4)–(5)) leaves U.S. citizens taxable as if there were no treaty; only the alimony/child-support rule in Article 17(3) is preserved. Relief comes through the foreign tax credit.

National pension (kokumin nenkin / kousei nenkin): Pay-as-you-go social insurance without segregated trust assets. Prevailing view: not a foreign trust. Some practitioners file protectively.

3520/3520-A treatment: For corporate DB/DC, if they qualify under Rev. Proc. 2020-17, no forms required. Otherwise, report them as employer plans’ trusts (see the note at the end of this section). For national pension, likely no filing required, but protective filing is an option.

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

iDeCo (individual-type Defined Contribution pension): Voluntary individual retirement account where the member chooses investments from a fund menu. Contributions are tax-deductible in Japan. Assets held in trust.

§301.7701-7 classification: Likely a foreign trust. Funded plan with segregated assets.

Rev. Proc. 2020-17 analysis: iDeCo is an individual plan; §5.03(6) (the employer-plan nondiscrimination condition) does not apply. Whether iDeCo meets all §5.03(1)–(5) conditions requires plan-specific analysis. Full reporting is required unless that analysis confirms qualification.

3520/3520-A treatment: Full reporting required. File Form 3520-A and Form 3520 Part II annually. Report contributions, investment returns, management fees, and the opening/closing balance. If iDeCo holds non-U.S. funds, PFIC rules may apply to them; we do not determine PFIC status or whether Form 8621 is due.

NISA (Nippon Individual Savings Account): a tax-exempt brokerage account opened at a bank or securities company. It is not a trust, so Forms 3520/3520-A do not apply; the U.S. does not recognize the exemption, FBAR and Form 8938 apply, and PFIC rules may apply to Japanese investment trusts held in a NISA (we do not determine PFIC status). Rev. Proc. 2020-17 is not relevant.

Gifts and inheritances

Gifts and bequests totaling more than $100,000 in a year from one nonresident alien individual or foreign estate (adding together gifts from donors related to each other) require Form 3520 Part IV reporting; a gift from a relative who is a U.S. citizen living in Japan does not count, and gifts from foreign corporations or foreign partnerships have a separate threshold of $20,573 (for 2026, indexed for inflation). Japan imposes its own inheritance tax (souzoku-zei) and gift tax (zouyo-zei), which are Japanese obligations that do not affect the U.S. reporting requirement.

Common scenarios include inheritance of Japanese real property, bank deposits, and securities.

Penalties and practical notes

The Japanese individual tax year is the calendar year: no conversion needed.

The Japan Pension Service sends an annual nenkin teikibin to National Pension and Employees’ Pension Insurance participants (the public system, not a trust); corporate DC and iDeCo record-keepers issue their own statements. Documents are in Japanese and may need translation.

The key analytical question is which of the two a given arrangement is: the public social insurance system is not a trust, while funded plans such as corporate DC and iDeCo are likely trusts. When in doubt, file protectively.

Convert yen 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.