Why Most Israelis Ignore Reporting Pension Plans to the USA?
The obligation to report Israeli pension plans to the American tax authorities has existed since 1986, yet most American citizens in Israel still ignore it. Keren Hishtalmut, Kupat Gemel, and budget pensions are all considered “foreign pension plans” in the eyes of the IRS, and the obligation to report them applies to every American citizen regardless of where they live.
The stunning fact: out of approximately 200,000 American citizens living in Israel, fewer than 15 percent properly report their pension plans. The rest? They risk penalties exceeding $60,000 per tax year, in accordance with Section 6677 of the IRC.
What Exactly Counts as a Foreign Pension Plan in the IRS’s Eyes?
The IRS defines a foreign pension plan as any pension arrangement managed outside the United States. In Israel, this includes three main types:
Keren Hishtalmut – considered a Foreign Grantor Trust under IRC Sections 671-679. Although in Israel it is intended for professional development, the IRS views it as a pension savings vehicle. Reporting is required using Form 3520 starting from the first year of deposit.
Kupat Gemel – defined as a Foreign Pension Plan under Section 402(b) of the IRC. Funds deposited in Kupat Gemel are considered taxable income in the year of deposit, unless a special election is made using Form 8833.
Budget Pension – pension plans for government employees, government companies, and large corporations are considered Foreign Defined Benefit Plans. Reporting is required on Form 8938 if the plan value exceeds $200,000 for single filers or $400,000 for married filers.
The Fatal Mistake: “It’s Not Really a Pension”
Last year I met a client who claimed: “My Keren Hishtalmut is just for courses, not for retirement.” He was badly mistaken. The IRS is not interested in the local designation of the money, but rather in the fact that it is money accumulated over the long term with tax benefits.
The result? A penalty of $35,000 for failing to report a Keren Hishtalmut totaling 180,000 shekels (approximately $54,000) over three years. The penalty was higher than the money accumulated in the fund itself.
The reason for this mistake is simple: most Americans in Israel rely on Israeli definitions. In Israel, Keren Hishtalmut is not considered a pension. But the IRS operates according to American definitions, where any long-term savings with tax benefits is considered pension-related.
When Exactly Must You Start Reporting?
The obligation begins from the moment of the first deposit, not from the moment of withdrawal. This is a critical point that many miss. If you opened a Keren Hishtalmut in January 2025, you will already need to report it in your tax return for 2025 (which will be filed by April 15, 2026).
The following table shows the types of reporting required by plan type:
| Plan Type | Form Required | Reporting Threshold | Filing Deadline |
|---|---|---|---|
| Keren Hishtalmut | 3520 | Any amount | April 15, 2026 |
| Kupat Gemel | 8833 + 1040 | Any amount | April 15, 2026 |
| Budget Pension | 8938 | $200,000/$400,000 | April 15, 2026 |
The Penalties: Numbers That Will Make Your Head Spin
The penalties for failing to report foreign pension plans are among the highest in the American tax code. Here are the exact figures for the 2025 tax year:
Form 3520 (Keren Hishtalmut): A penalty of 35 percent of the annual deposit amount, or $10,000 – whichever is greater. If you deposited $20,000 per year, the penalty would be $10,000. If you deposited $50,000, the penalty would be $17,500.
Form 8833 (Kupat Gemel): There is no specific penalty for the form itself, but failure to file it results in full taxation of the deposits. Instead of paying tax only on the earnings, you will pay tax on all the money deposited – up to a 37 percent top tax rate.
Form 8938 (Budget Pension): A penalty of $60,000 per tax year for continued non-reporting. The penalty starts at $10,000 in the first year and climbs to $60,000 if you do not correct the reporting within 90 days of IRS notice.
Can Missing Reports Be Corrected?
The answer is yes, but it is complicated and expensive. The IRS offers several programs to correct missing reports, but each has different conditions and costs.
Streamlined Foreign Offshore Procedures: Designed for Americans living abroad who did not report intentionally. Requires filing the last three tax years and six years of FBAR, plus a penalty of 5 percent of the highest balance in foreign accounts. This program is not always suitable for complex pension plan cases.
Voluntary Disclosure: For more serious cases or when there is concern about criminal investigation. The process is more expensive but offers protection from criminal prosecution.
Delinquent FBAR Submission: If the only deficiency is in FBAR reporting (not relevant to Israeli pension plans, but important to know).
The Hidden Trap: Double Taxation
One of the most complex issues in reporting Israeli pension plans is avoiding double taxation. Israel grants tax benefits on deposits to Keren Hishtalmut and Kupat Gemel, but the United States may view these benefits as taxable income.
For example: you deposited 50,000 shekels to Kupat Gemel in 2025. In Israel, you received a tax benefit of approximately 17,500 shekels (35 percent marginal tax rate). But the IRS may view this deposit as taxable income of $15,000 (the dollar value of the deposit), and collect tax on it of up to $5,550.
The solution: Form 8833 – Treaty-Based Return Position Disclosure. This form allows you to claim that the Kupat Gemel deposit is protected under the tax treaty between Israel and the United States to prevent double taxation. But this is not automatic – you must file the form and justify your legal position.
According to IRS instructions, failure to file Form 8833 when required may result in disallowance of the treaty benefit sought.
Real-World Case Study: What Reporting Actually Looks Like
Let us examine a real case of an American in Israel with all three types of pension plans:
David, age 45, works for a high-tech company:
- Keren Hishtalmut: Balance of 280,000 shekels, annual deposit of 45,000 shekels
- Kupat Gemel: Balance of 850,000 shekels, annual deposit of 95,000 shekels
- Budget Pension (from previous government company employment): Current value of $180,000
Required Reporting for Tax Year 2025:
1. Form 3520 for Keren Hishtalmut – report deposit of $13,500 (45,000 shekels) and balance of $84,000
2. Form 8833 for Kupat Gemel – claim that the deposit is protected under the treaty
3. No reporting required for the budget pension (below the $200,000 threshold)
Estimated cost of preparing the reports: $2,500-$4,000 with a specialized accountant. Cost of non-reporting: up to $14,750 penalty on Keren Hishtalmut alone, plus double taxation on Kupat Gemel.
New Changes for Tax Year 2025
Tax year 2025 brought several significant changes to foreign pension plan reporting. The IRS has tightened oversight of Form 3520 and added new requirements for detailed reporting of fund sources.
Additionally, the IRS released new clarifications regarding taxation of distributions from foreign pension plans. The message is clear: oversight is increasing, and penalties are becoming more severe.
Another change: as of 2025, you must attach a certified English translation of plan documents to Form 3520. This means you will need to translate the Keren Hishtalmut bylaws or Kupat Gemel agreement – an additional cost of $500-$1,000.
What Do You Do Now? Practical Recommendations
If you are an American citizen in Israel with pension plans, the time to act is now. The filing season for tax year 2025 is already open, and the deadline for filing is April 15, 2026.
First step: Gather all documents – annual statements from Keren Hishtalmut, Kupat Gemel, and budget pension details. You will need balances as of December 31, 2025, and annual deposit amounts.
Second step: Check whether you have missing reports from prior years. If so, consider entering the Streamlined or Voluntary Disclosure program before the IRS discovers the deficiencies on its own.
Third step: Consult with an accountant specializing in American-Israeli taxation. Mistakes in this area are very expensive, and it is not advisable to try to handle this alone.
Bottom Line: The Time to Act Is Now
Reporting Israeli pension plans to the United States is not a matter of choice – it is a legal obligation with severe penalties. The biggest mistake I see is postponing dealing with the issue “until next year.”
The reality is that each year of delay adds another layer of complications and penalties. If you have a Keren Hishtalmut, Kupat Gemel, or budget pension, and have not reported them in the past – the time to act is now, before the IRS discovers the deficiencies on its own.
The cost of professional advice and proper reporting is always lower than the cost of penalties and double taxation. As in all areas of American taxation, early knowledge and action save significant money in the long run.