The New and Improved Thai Provident Fund
By Peggy Creveling, CFA and Chad Creveling, CFA
If you're an expat working in Thailand, you may have the opportunity to participate in an employer-sponsored Thai Provident Fund. Thai Provident Funds (TPFs) are voluntary "defined contribution" pension plans intended to help private-sector employees in Thailand save for retirement. The plans encourage retirement savings by allowing Thai tax-deductible employee and employer-matching contributions to be made to individually owned employee accounts. Depending on your tax bracket, your employer's matching contribution, and the plan's vesting schedule, participating in a Thai Provident Fund may already be a good deal for many expats. But the good deal just got better—recent improvements to the Thai Provident Fund Act have increased both the program's flexibility and its Thai income tax efficiency.
After Employment Ends, Roll to an RMF and Preserve Tax-Free Benefits
Under the old TPF Act, when employment ended, the money in a TPF could only be paid out in a lump sum. Unless you were of retirement age and had participated in the plan for more than five years, a significant amount of Thai tax could be payable on the lump sum distribution. One of the most helpful changes under the revised act is that now plan participants facing employment termination can instead request that their TPF account balances be transferred to a Retirement Mutual Fund (RMF) until they meet requirements to withdraw their funds free of Thai tax. Depending on the size of an employee's TPF account, this change alone could result in substantial Thai tax savings.
Now Employees Can Make Greater Contributions
Depending on the articles of a company plan, a TPF may allow an employer to contribute anywhere from 2% to 15% of annual wages to an employee's TPF account, with a maximum cap of THB 500,000 (about USD 14,000) per year. Under the old rules, employees could not contribute more than their employer, so if their company chose to contribute just 2% of annual wages, the employee was similarly limited to a 2% contribution. Under the new rules, no matter what amount their employer is contributing, employees can contribute and deduct the maximum amount allowable—15% of annual wages or THB 500,000, whichever is lower.
Additional Flexibility for Those Over 55
Previously if you were a TPF participant past age 55 whose employment was ending, if you were not retiring or had not contributed to your TPF for at least five years, your only choice was to receive your TPF funds in a lump sum and owe Thai tax on the distribution. Under the new rules, employees who are past 55 can instead choose to receive payments in installments instead of a taxable lump sum. These installment payments may be subject to a lower marginal tax rate and, if not already tax exempt, may become tax exempt once the employee has been a member of the provident fund for more than five years.
In a Crisis, Contributions Can Be Halted Temporarily
Finally, in the event of an economic crisis or natural disaster, the Finance Minister will now have the power to allow employees and employers to stop or postpone submitting contributions for specific businesses, for up to one year at a time. Previously the only option available in extreme circumstances was to terminate the plan and pay out the proceeds in a taxable lump sum.
Special Considerations for U.S. Expats
TPFs can be a great deal in terms of receiving an employer's matching contribution and saving on Thai income tax. If you are an American, however, there are additional considerations you should know. U.S. citizens are taxed by the IRS on worldwide earnings and compensation. TPFs are not considered qualified retirement plans by the U.S., and therefore there is no U.S. tax deduction allowed on contributions. In general, this means that employee contributions are still taxable in the U.S., and employer contributions are taxed as income when the employee vests into them. Similarly, investment returns on both employee and employer contributions are U.S. taxable income in the year they are earned. Additionally, TPFs may be considered passive foreign investment companies (PFICs) by the IRS, and investment income may require special treatment. Check with your tax advisor for more details.
Despite the lack of recognition as a tax-advantaged vehicle by the IRS and potential classification as PFICs, contributing to TPFs can still make sense for Americans, especially those whose compensation does not exceed the foreign earned income exclusion (FEIE). In this case, all compensation earned in Thailand would be shielded from tax by the IRS due to the FEIE. Contributions to a TPF would then save Thai tax. Contributions can still make sense for those earning in excess of the FEIE, but the tax benefit by itself diminishes as you enter the higher tax brackets. However, the employer-matching benefit may still make the exercise worthwhile for highly compensated U.S. expats, even if the net Thai-U.S. tax benefit is not great.
For many Thailand-based expats, the various benefits of Thai Provident Funds in boosting your retirement savings and saving on Thai tax just got even better. Do yourself a favor and check them out—just make sure you understand the rules and regulations, and for Americans, the potential tax consequences.