Financial Crimes Enforcement Network Issues Final Regulations on Foreign Financial Reporting

In our June 2009 and April 2010 issues, we alerted readers that employee benefit plans and those involved with plan investments could be required to report foreign accounts maintained in connection with plan investments to the

Internal Revenue Service (“IRS”) on Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts (“FBAR”). On February 24, 2011, the Financial Crimes Enforcement Network (“FinCEN”), the branch of the Treasury Department with rulemaking authority over the FBAR, issued final regulations which confirm that employee benefit plans are not exempt from this reporting requirement. Accordingly, those involved with plan investments should quickly acquaint themselves with the FBAR rules and take the following actions:

  • By April 15, make any necessary FBAR-related disclosures on Form 1040, Schedule B
  • If necessary, file an FBAR with the IRS by June 30, 2011
  • If any foreign accounts were not reported in prior years, apply for relief under the IRS Offshore Voluntary Disclosure Initiative by August 31, 2011

This article provides background information on FBAR reporting and describes changes made by the final regulations as they apply to employee benefit plans and those involved with their investments.


In general, a U.S. citizen or resident must report on an FBAR any financial interest in or signature or other authority over a foreign bank, securities or other financial account, if the aggregate value of such accounts exceeds $10,000. The FBAR is due by June 30 each year. Individuals required to file an FBAR must make a related disclosure on Form 1040. VEBAs and other tax-exempt entities required to file Form 990 must make an FBAR-related disclosure on Form 990.

Although the FBAR has been around since 1972, plan sponsors and fiduciaries were largely unaware of its existence until recently. Beginning in June 2009, following informal comments by IRS officials regarding the broad scope of the FBAR rules and the severe penalties for noncompliance, investors, including employee benefit plans, became very concerned about satisfying any FBAR reporting obligations they might have. But many had difficulty determining from the FBAR instructions and other available guidance whether they were required to file and what investments could trigger a reporting obligation.

Temporary Relief

In August 2009, the IRS issued Notice 2009–62, which announced that, pending further guidance, FBAR reporting would not be required with respect to commingled investment funds or by persons with signature or other authority over (and no financial interest in) a foreign financial account. In October 2009, over 15,000 individuals and entities not entitled to relief under Notice 2009–62 filed FBAR reports for calendar years 2003–2008 under an IRS voluntary disclosure program which reduced or waived penalties for failure to file an FBAR.

2010 Proposed Regulations

In February 2010, FinCEN issued a notice of proposed rulemaking on the FBAR, and the IRS extended the relief granted by Notice 2009–62. The IRS received over 40 comment letters, including several (one from this law firm) which requested a filing exemption for employee benefit plans and their fiduciaries, and numerous clarifications regarding the scope of the rules. One of the primary concerns expressed by plan sponsors and fiduciaries was the scope of the “signature or other authority” concept as applied to investment committees and others responsible for oversight of plan investments.

Final Regulations and Revised Instructions

FinCEN issued final regulations on FBAR reporting on February 24, 2011, and the IRS revised the FBAR instructions to conform to the final regulations on March 30, 2011. Although the regulations leave many questions unanswered and do not provide a filing exemption for employee benefit plans or plan fiduciaries, they do offer some welcome clarifications. The relevant provisions of the regulations are discussed below.

Unless an exception applies, an FBAR must be filed by “[e]ach United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country” if the aggregate value of such accounts exceeds $10,000 at any time during a calendar year.

For employee benefit plans, the first step in the analysis is determining whether any plan investment includes a foreign financial account.


An account is “foreign” if it is located outside the United States, even if the account is maintained at a branch of a U.S. bank. In contrast, an account is not foreign if the account is maintained at a U.S. branch of a bank located outside the United States. FinCEN received many comments requesting clarification on when an account is treated as foreign. The Preamble clarifies that, in general, an account is not a foreign account if it is maintained with a financial institution located in the United States. As an example, the Preamble states that an account with a U.S. broker through which a person purchases foreign securities is not treated a foreign account merely because the account contains securities of a foreign entity. The Preamble also explains that foreign custody accounts maintained by U.S. custodian banks in connection with their clients’ investments are not foreign for FBAR purposes unless the custodial arrangement permits the client to directly access assets held in the foreign custody account. The Preamble explains:

FinCEN received a number of comments asking for clarification regarding specific custodial arrangements. Commenters explained that in some cases a United States person may have an account with a financial institution located in the United States, such as a bank. According to the commenters, that U.S. bank may act as a global custodian and hold the person’s assets outside the United States. In many cases, the custody bank creates pooled cash and securities accounts in the non-U.S. market to hold the assets of multiple investors. These accounts, commonly called omnibus accounts, are in the name of the global custodian. Typically, the U.S. customer does not have any legal rights in the omnibus account and can only access their holdings outside of the United States through the U.S. global custodian bank. FinCEN wishes to clarify that in this situation, the U.S. customer would not have to file an FBAR with respect to assets held in the omnibus account and maintained by the global custodian. In this situation, the U. S. customer maintains an account with a financial institution located in the United States. However, if the specific custodial arrangement permits the United States person to directly access their foreign holdings maintained at the foreign institution, the United States person would have a foreign financial account.Financial Account

A financial account is a bank, securities or other financial account. Other financial accounts include:

  • a life insurance or annuity policy that has a cash value;
  • an account with a commodities or futures broker; and
  • an account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.

Notably absent from this list are commingled investment funds (other than mutual funds). FinCEN has reserved judgment regarding these funds pending further guidance.

If any plan investment contains a foreign financial account, the balance of the analysis consists of determining which individuals and entities are obligated to report the account. FBAR filers fall into two broad categories:

  • those reporting a financial interest; and
  • those reporting signature or other authority.

Because the obligation to file an FBAR is determined on a person-by-person basis and not on an account-by-account basis, a single foreign account may have to be reported by multiple individuals and entities. The final regulations confirm that this is intended. As a result, if a plan trust has a financial interest in a foreign account, the plan trust must file an FBAR. The same account also must be reported by every person with signature or other authority over the account, including individual members of an investment committee or a board of trustees, investment managers, investment advisors and officers and employees of a plan sponsor. (Although officers and employees of certain large companies are not required to report signature or other authority over the company’s foreign accounts, this exception does not apply to foreign accounts held by an employee benefit plan sponsored by the company, because the plan is a separate legal entity.)

United States Person

Only a “United States person” is required to file an FBAR. Under the final regulations, a United States person includes a citizen or resident of the United States, or an entity formed under federal or State law. Plan trusts and individuals involved with plan investments generally will fit this description; those who do not are not required to file an FBAR.

Financial Interest

A person has a financial interest in any account for which he or she is the owner of record or holder of legal title. If multiple individuals fit this description, each must file a separate FBAR. A person is treated as having a financial interest in an account if the owner of record or holder of legal title is:

  • acting on his or her behalf as an agent, nominee or attorney; or
  • a corporation, partnership or trust in which the person has greater than a 50% interest.

In the case of a trust, including a plan trust, each trustee holds legal title to all trust assets (whether the trustee is an institution or an individual) and, therefore, has a financial interest in the trust’s financial accounts. The final regulations suggest that FinCEN expects both a trust and its trustee(s) to file an FBAR. As a result, in the case of a trust with multiple trustees (such as a Taft-Hartley trust) each and every plan trustee must file his or her own FBAR, even if the plan files its own FBAR.

The final regulations exempt pension plan participants and beneficiaries from FBAR reporting.

Signature or Other Authority

One major deficiency in the prior FBAR guidance was a lack of clarity regarding the scope of the “signature or other authority” rule. Broadly interpreted, the definition of this term under the proposed regulations would have applied to any person included in a chain of individuals with authority to cause a withdrawal of assets held in a foreign account (e.g., a plan trustee, custodian, investment manager or investment committee member). Under the final regulations, signature or other authority is defined as “authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.”

The Preamble adds that this definition is intended to apply to an individual “only if the individual has the authority to directly deliver instructions to the foreign financial institution”. The Preamble further states:

The test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account. The phrase ‘in conjunction with another’ is intended to address situations in which a foreign financial institution requires a direct communication from more than one individual regarding the disposition of assets in the account.Next Steps

With April 15th right around the corner, now is the time to determine whether your plan trust or any of the individuals involved with plan investments have an FBAR reporting obligation. If the answer is yes, be sure to inform individuals required to file an FBAR that they may be required to make an FBAR-related disclosure on their personal tax return, and be sure to complete and file the FBAR with the IRS by June 30th. FBARs not received by the IRS by that date are not considered timely filed, and it is not possible to obtain a filing extension. Finally, if you were required to and did not file FBARs for prior years, consider filing them by August 31 under the IRS Offshore Voluntary Disclosure Initiative. Please contact us if you have any questions or concerns about FBAR reporting.