South Korea

Tax-deferred employer plans

Korean corporate pension plans (introduced 2005; since July 2012 newly established businesses must set up DB or DC within one year, but existing employers may keep severance):

Defined Benefit (DB): Employer promises a specific benefit; assets set aside in a trust or insurance contract. Likely a foreign trust: segregated, funded, supervised by the Ministry of Employment and Labor.

Defined Contribution (DC): Employer contributes a fixed amount to individual accounts; employee chooses investments. Segregated assets: likely a foreign trust.

§301.7701-7 classification: Both DB and DC plans likely fail the court test (Korean courts supervise) and control test (Korean trustees control).

Rev. Proc. 2020-17 analysis: Whether a corporate pension 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. 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.

Severance pay (toejik-geum): If still an unfunded employer book reserve, it is not a trust: no segregated assets. If converted to a funded DB or DC plan, the trust analysis above applies. Direct employer severance payments at separation are not distributions from a foreign trust.

National Pension Service (NPS): Pay-as-you-go social insurance. 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). Distributions from funded plans go on Part III unless reported as compensation income.

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

Individual Retirement Pensions (IRP): Since 14 April 2022, severance must be paid by transfer into an IRP in the employee’s name, and DB and DC benefits the same way, unless the employee retires at 55 or over or another listed exception applies (Employee Retirement Benefit Security Act arts. 9(2)-(3), 17(4)-(5)). The holder may add money at their own expense (art. 24(3)). The assets are held under an insurance contract or a trust contract (art. 29(2)), so an IRP may or may not be a trust.

§301.7701-7 classification: Likely a foreign trust.

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

3520/3520-A treatment: For a trust-form IRP holding only money the member put in, full reporting: each contribution is a Part I transfer, and Part II and Form 3520-A are due each year. For severance or plan benefits transferred in, U.S. law is not settled. If that money is still the employer’s, the IRP is reported as an employer plan’s trust: no Part I, and the member owns only the part their own contributions fund, once those exceed the money transferred in. If the transfer is a payout to the member, put back in, the member owns the whole IRP: Part I for each transfer, Part II and Form 3520-A each year, and its income taxed each year. No IRS guidance addresses IRPs. A small business’s IRP plan that the employer pays into (art. 25) is an employer plan.

Gifts and inheritances

South Korea is a common source of gifts and inheritances for U.S. persons, particularly among the large Korean-American 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 is required. Gifts from foreign corporations or foreign partnerships exceeding $20,573 (for 2026, indexed for inflation) are also reportable.

South Korea imposes gift tax (up to 50%) and inheritance tax (up to 50%). These are Korean obligations. Common scenarios: cash gifts from parents for home purchases, inheritance of Korean real estate or financial assets, transfers from family-controlled businesses.

Penalties and practical notes

The Korean tax year is the calendar year: no conversion needed. Korean pension providers issue annual statements in Korean that may need translation.

The U.S.–Korea treaty does not contain a pension deferral article. Art. 23 taxes pensions only in the residence State, but the saving clause (Art. 4(4)) lets the U.S. tax its citizens as if the treaty had not come into effect. Art. 4(5) preserves only Arts. 5, 7, 24, and 27; Art. 23 is not listed. The treaty therefore doesn’t defer U.S. tax, and Rev. Proc. 2020-17 doesn’t either: it removes reporting, not tax. For a corporate DB or DC plan, amounts are taxed when the member’s interest vests (§402(b)(1)) and growth after that when paid out, under §72 (§402(b)(2)). The exceptions are a part the member owns (voluntary contributions above the employer’s) and a highly compensated employee in a plan that fails the U.S. coverage tests (§402(b)(4)(A)). Earnings on what the member alone puts into an individual account are taxable each year.

Convert Korean won 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.