Future U.S. Social Security retirement benefits generally should not be included in the $2 million net worth calculation used to determine covered expatriate status. Foreign retirement benefits require a separate analysis. An employer pension, an individual retirement fund, and a government social insurance benefit may all provide retirement income, but their legal structures can produce different results under U.S. expatriation tax rules.

This distinction matters for U.S. citizens considering renunciation and long-term green card holders considering termination of U.S. tax residency. A pension valuation can move someone across the $2 million threshold. Conversely, treating every future government benefit as a retirement account can overstate net worth. For people with work histories in both Japan and the United States, identifying the exact benefit is an essential part of preparing Form 8854.

Two separate questions about retirement benefits

Expatriation planning requires answering two questions. First, does the retirement interest count toward net worth? Second, if the individual is a covered expatriate, how is that interest taxed?

A person generally becomes a covered expatriate by meeting the net worth test, exceeding the applicable five-year average annual net income tax liability threshold, or failing to certify five years of federal tax compliance. Certain dual citizens at birth and certain minors may qualify for exceptions to the financial tests, subject to statutory conditions. Falling below $2 million alone therefore does not establish that someone avoids covered expatriate status. [1]

The net worth test measures wealth as of the expatriation date. The general mark-to-market regime, by comparison, treats covered property as sold for fair market value on the preceding day. Deferred compensation follows separate rules. A pension can count toward net worth even when it is excluded from the deemed-sale calculation. Keeping these questions separate prevents a common planning error: equating “not subject to mark-to-market tax” with “not an asset.” [1, 2]

Why future US Social Security benefits generally are excluded

U.S. Social Security is a statutory social insurance program. Payroll taxes and an earnings record help determine eligibility and benefit amounts, but they do not create a personal investment fund owned by the worker. In Flemming v. Nestor, the Supreme Court distinguished Social Security benefits from contractual annuity rights. The Social Security Administration explains that paying into the program does not establish a contractual right to an unchanged future benefit. [3]

Federal law also generally prohibits assigning or transferring the right to future Social Security payments. An estimated monthly retirement benefit therefore represents an expected statutory payment, rather than a balance that the individual can sell, give away, or withdraw. [4]

These characteristics support excluding the present value of future U.S. Social Security benefits from expatriation net worth. Ordinary future Social Security retirement benefits also generally do not form part of the recipient’s federal gross estate and are not ordinarily treated as deferred compensation under Section 877A(d). However, Notice 2009-85 does not expressly announce a Social Security exclusion by name. The conclusion follows from the nature of the benefit and the governing property and deferred compensation rules; it should not be presented as a quotation from an explicit IRS ruling. [2–4]

The exclusion concerns future benefits. Once a payment has been received and remains in a bank account, the cash is an existing asset. Its origin as a Social Security payment does not ordinarily remove that cash from the expatriation net worth calculation.

Why estate tax treatment is relevant but not decisive

Notice 2009-85 uses federal gross estate principles to identify property subject to the general mark-to-market regime. For the net worth test, however, the notice refers to Section III of Notice 97-19, which applies gift tax ownership and valuation principles, with specified modifications. These are related frameworks, but they are not identical. [2, 5]

Consequently, a statement that a benefit is excluded from the gross estate does not, by itself, complete the net worth analysis. The adviser must consider the nature of the interest and the applicable net worth rules. This distinction becomes particularly important when evaluating foreign retirement arrangements, where local law may provide withdrawal rights, death benefits, guarantees, or other features that differ from U.S. Social Security.

The estate tax comparison is a useful starting point. It is not a universal shortcut for deciding whether every pension belongs on Form 8854.

Foreign pension plans and deferred compensation

Section 877A(d)(4) expressly includes an interest in a foreign pension plan or similar retirement arrangement or program within the definition of a deferred compensation item. This language is broad. A foreign pension cannot be excluded merely because it is administered overseas or receives favorable tax treatment in its home country. [6]

For an ordinary foreign retirement plan, the net worth analysis generally includes the value of the individual’s interest. A plan with an individual account may provide a readily identifiable balance. A defined benefit pension instead promises payments calculated under a formula; its value may require an actuarial present value calculation. The Form 8854 instructions direct taxpayers to report the present value of U.S. and foreign pensions or similar retirement arrangements. [1]

The absence of an individual account is therefore insufficient to establish an exclusion. Many employer pensions have no participant investment account yet still provide valuable retirement rights. Whether a government social insurance program should be treated similarly requires examining that particular program rather than relying on the word “pension.”

How covered expatriates may be taxed on foreign pensions

For a covered expatriate, a deferred compensation item can be classified as eligible or ineligible. An eligible item generally follows a system of 30% withholding on taxable payments after expatriation. An ineligible item generally triggers a deemed receipt of the present value of the accrued benefit on the day before expatriation, subject to applicable adjustments and exceptions. The taxpayer may face income recognition without receiving cash from the plan. [6]

Eligibility requires more than submitting a taxpayer election. The payor must be a U.S. person or satisfy the requirements for treatment as a U.S. person for this purpose. The expatriate must provide the required status notification and irrevocably waive applicable treaty reductions in withholding. A foreign administrator’s cooperation and the availability of a workable procedure must be verified; eligibility should never be assumed. [1, 6]

The exclusion for gains under the general mark-to-market regime does not shelter income recognized under the separate deferred compensation rules. Any previously taxed amounts and later distribution adjustments also require review. A simple calculation that multiplies the pension value by a capital gains rate can therefore produce a misleading estimate of the exit tax. [2, 6]

The exception for services outside the United States

Section 877A(d)(5) provides an important exception for deferred compensation attributable to services performed outside the United States while the individual was neither a U.S. citizen nor a U.S. resident. This can be particularly relevant to a Japanese national who earned pension benefits in Japan before becoming a U.S. tax resident. [6]

The conditions matter. Working abroad while already a U.S. citizen does not meet this exception. Physical relocation is also not a substitute for determining U.S. tax residency. Where a pension covers multiple periods, records should establish which accrued benefits relate to qualifying services. Notice 2009-85 permits a reasonable allocation consistent with the guidance it identifies. [2]

This exception addresses taxation under the deferred compensation provisions. It does not automatically remove the corresponding pension interest from net worth. It also should not be described as a blanket exemption from every possible U.S. tax on future pension payments. Classification, valuation, and the taxation of later distributions remain separate questions.

Japan public pensions and individual records

Japan’s Kosei Nenkin, or Employees’ Pension Insurance, maintains individual enrollment and remuneration records used to determine benefits. Nenkin Net allows recipients to review their pension records and annual benefit amounts. These records do not mean that each participant owns an investment account with a maintained asset balance. [7]

Japan’s public pension system uses pooled financing, principally on a pay-as-you-go basis, supported by reserves. The Ministry of Health, Labour and Welfare expressly explains that the reserves have no specific share allocated to individuals. A contribution history or projected annual benefit should therefore not be mistaken for a personally owned fund balance. [8]

These features provide a basis for considering whether Japanese public pension benefits resemble U.S. Social Security for expatriation purposes. However, structural similarity is an argument for analysis, rather than conclusive IRS authority. The authorities discussed here do not expressly resolve the Section 877A classification of Kosei Nenkin or Kokumin Nenkin. We would not describe all foreign public pensions without individual accounts as automatically excluded.

A proper review should distinguish statutory public benefits from an employer pension, a personal pension, and a retirement arrangement with an individual account. Mixing them together under “Japanese pension” can conceal material differences. The review should also examine benefit entitlement, withdrawal or lump-sum rights, and the legal character of any survivor payments.

How a pension can change the planning result

Consider a long-term green card holder with $1.85 million of net assets before considering retirement benefits. Assume the person also expects future U.S. Social Security payments. Those future payments generally should not be capitalized and added to net worth solely because a retirement projection assigns them an economic value.

Now assume the individual also holds an ordinary foreign employer pension with a properly determined value of $250,000. If that interest is includible, total net worth becomes $2.10 million. The pension can cause the person to meet the net worth test, even if some or all of its benefits qualify for the foreign-service exception when computing deferred compensation income.

If the additional benefit is instead a Japanese statutory public pension, the adviser must resolve its classification before using the same calculation. The uncertainty is especially consequential when inclusion would change covered expatriate status. Running calculations both with and without the disputed benefit can reveal how much depends on the legal conclusion, but a final filing still requires a supportable position.

Preparing an expatriation pension review

Before setting an expatriation date, collect documents for every retirement benefit separately. Useful records include the governing plan or statutory description, account statements, benefit estimates, employment dates, contribution histories, and a timeline of citizenship and U.S. tax residency. Ask the administrator whether a quoted figure represents contributions, an account balance, or a projected annual payment.

For benefits that require valuation, document the valuation date, exchange rate, payment assumptions, and methodology. For an uncertain public pension classification, retain the legal analysis supporting the filing position. Starting early leaves time to obtain missing records and evaluate the effect on both covered expatriate status and potential tax liability.

CHI Border assists cross-border individuals and families with expatriation tax planning and Form 8854 preparation. If you have U.S. Social Security benefits, Japanese public pension rights, or other foreign retirement interests, contact us to discuss how those benefits fit into your expatriation analysis.

Disclaimer

This article provides general educational information and is not individualized tax or legal advice. Pension classification and expatriation consequences depend on the governing law, plan terms, work history, citizenship, residency, and other facts. Foreign public pension treatment may involve unresolved questions. Consult a qualified adviser before relinquishing citizenship, terminating long-term residency, or taking a position on Form 8854.

Sources

Source numbers in the article refer to the authorities below. Form references were checked against the currently available 2025 Form 8854 instructions. Sources reviewed September 30, 2026.

[1] IRS Instructions for Form 8854

[2] IRS Notice 2009 85 Sections 2 3 and 5

[3] Social Security Administration Flemming v Nestor

[4] Social Security Act Section 207 Assignment of Benefits

[5] IRS Notice 97 19 Section III Bulletin 1997 10 printed page 41

[6] Internal Revenue Code Section 877A

[7] Japan Pension Service Reviewing Pension Records on Nenkin Net

[8] Japan Ministry of Health Labour and Welfare Pension FAQs PDF page 55