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Distribution Reporting with Invalid SSN


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I know the issue has been discussed before, but I'm curious how others are handling 1099-R reporting where you know you have an invalid SSN.

Assume the participant has unequivocally confirmed they have been using both a name and SSN that was not properly assigned to them. They have a vested balance in the plan and are now requesting a distribution. The participant is still in the U.S. Assume the plan administrator cannot ascertain the participant's country of origin or legal citizenship. No question that payment is due under the terms of the plan, etc. 

I would assume most would not continue using an SSN on a 1099-R they know to be invalid as to the participant.

It seems the participant could apply for a taxpayer ID using a Form W-7. I'm not familiar with the process, but I assume the plan administrator could not force the participant to do so. 

Is there another mechanism to report while somehow flagging that the SSN is invalid?

Is there an argument to be made that a distribution cannot be processed until the participant has provided accurate information allowing the plan administrator to report the distribution?

If not, how would you report?

Thanks in advance.

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Before sorting out tax-information reporting,

What evidence must or should a plan’s administrator collect and evaluate to consider whether a claimant is the same person as the participant with a different name and taxpayer identification number?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The claimant is a former employee who is personally known to the employer, so they are confident that the individual requesting the distribution is the same individual who was employed under (and who accrued the account balance under) the name and SSN previously given. (I think this is what you're asking.) They have, however, admitted that both the name and SSN used were not theirs, and that they are not in the U.S. legally, and have not provided any other taxpayer ID number or country of citizenship.  

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Insist on him getting a TIN now that it is known the SSN is invalid.  Period.  

For some reason IRS comes down like a ton of bricks on 1099-R payors reporting distributions with invalid SSNs, this after years of accepting payroll returns, tax withholding and W-2 filings using those same SSNs.    IRS first assesses fines on the payors, and it takes a couple of years to get them waived, so they payors routinely have at least two or three pending assessments open with IRS.   Basis for penalty abatement is the payors have no way knowing the SSNs were invalid, but that's not the case here.

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I carry stuff uphill for others who get all the glory.

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No one should tax-report using an identification number known to be false.

The participant may apply for a U.S. taxpayer identification number.

https://www.irs.gov/forms-pubs/about-form-w-7

Internal Revenue Code of 1986 (26 U.S.C.) § 6103 limits the uses of taxpayer information.

The administrator or payer should get the distributee’s address, to support tax-information reporting and withholding for taxes, including not only Federal income tax but also State and local income taxes (at least to the extent of jurisdiction over the plan’s trustee or its payer).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thank you both. Of course, our preference would also be to have a valid TIN before the distribution. It sounds like the Form W-7 is the right avenue.

If they refuse, does anyone have an opinion on whether the plan could rightfully postpone the distribution until being provided with a valid TIN to allow it to fulfill its legal reporting obligations?  

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Even if the participant might sue for her benefit, shouldn’t a court readily find that it’s reasonable for a plan’s fiduciaries to require information to the extent needed for the fiduciaries to obey public law?

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Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I would certainly hope so; it makes sense to me. No different than needing a good address, correct account number for a rollover, etc. Just curious if others had experience with being forced into the issue. Hopefully it won't come to that in any event. 

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I'd consider providing valid reporting info as part of the plan's claims procedures.  It's gonna be a heckuva lot easier and cheaper for him to file a form and get a TIN than it is to hire a lawyer.  

I carry stuff uphill for others who get all the glory.

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In the 1980s, some plans’ documents set furnishing necessary information as a condition for a distribution.  Clauses of that kind described necessary information as whatever the plan’s administrator or trustee needs to apply the plan’s provisions and obey law.  Some further described as a non-exhaustive illustration that this includes furnishing one’s name, address, date of birth, and taxpayer identification number.

Do IRS-preapproved documents include something like that?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Peter, our Relius pre-approved documents don't appear to have any specific rules on the topic, but the broader administrative powers in the document I think could be read to give the administrator the authority to request similar information, particularly if it's required to comply with law. Some of our individually designed plans have more targeted language.

C.B., maybe this could be analyzed like a missing participant? You're missing a piece of information needed to make the distribution (albeit not missing the person). If you try all reasonable methods to obtain the participant's taxpayer ID, but cannot, maybe treat it as a forfeiture at the time a distribution is required under those Code sections then reinstate when they provide the required information? Or maybe lean on similar IRS guidance directing agents not to penalize a plan for failing to make required distributions if the participant (or a piece of the participant's required information?) cannot be located after a diligent search. I would feel much better erring on the side of potentially violating 401(a)(9) or 401(a)(14) and explaining the situation, rather than knowingly reporting a timely distribution under a fraudulently obtained SSN.  

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C.B. Zeller, thank you for helping us clarify.  A provision of the kind I described often had an exception for an involuntary distribution, including a distribution on normal retirement age or to meet a minimum-distribution provision.  But it might fit for a participant-requested distribution.

EBECatty, if the participant has not furnished needed information by the time an involuntary distribution is required, a plan’s administrator might have little or no choice but to delay a distribution until the distributee is sufficiently identified.  But I would not forfeit the participant’s otherwise non-forfeitable benefit unless doing so is needed to complete a terminated plan’s final administration.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Given the level of expertise on this Board this info might be too basic, but you can apply to the Social Security Administration to have limited access to their online database to confirm a SSN.  Once authorized, you can input name, DOB and SSN and immediately find out if the SSN is valid for that participant or not.  It will not give you a correct SSN, will just confirm or reject one you already have.  You can also batch process large numbers of SSNs, which is helpful for ACA reporting for covered dependents.  It is called Social Security Business Services Online.   

In this case it will give you "official" proof that the SSN you have for this employee has not been legally assigned to them.

Tangentially-related stories--we had an employee who, when preparing for his retirement, wanted to know why his "prior service" was not included in his pension.  We had no record of prior service despite excellent records going back many decades and asked him for details.  He claimed we had employed him many years ago under a fake name and SSN when he was in the country illegally.  We did have a record for someone with that name who had been fired for job abandonment, and we told him if he could provide records (leases, utility bills, pay stubs, or anything else) that could plausibly link him to that name and address/SSN, we would give him prior service credit.  That was the end of that.    We also had a participant whose 401(k) enrollment kicked out of the recordkeeper's system since another client's employee had the same SSN and the SSA confirmed that our employee was not the legitimate holder.   Of all the SSNs available, how unlucky for him that he had to pick one that was already associated with an account at that particular mutual fund vendor.

And before you ask, it turns out that the company that did our background checks only checked to see that the SSN had been officially issued and had not been reported as deceased.  They did not take the additional step of making sure it belonged to the person who was using it.  We have since fixed that.

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I agree that Form w-7 is the way to obtain a US TIN. While it may not be applicable here, it seems useful to mention the type of situation where a plan can process a distribution for a claimant that lacks a US TIN. If the claimant submits a completed Form W-8BEN listing his/her permanent foreign address and my firm and our client have no reason to suspect that form is inaccurate, a distribution will be processed. Default withholding is at 30%, unless the claimant has specifically identified benefits under a tax treaty.   

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For what it's worth, the W-4P states this regarding someone submitting a W-4P but the SSN is not correct:

"If you submit a Form W-4P that doesn’t contain your correct social security number (SSN), the payer must withhold as if you’re single claiming zero withholding allowances even if you checked the box on line 1 to have no federal income tax withheld."

Presumably this would be a situation where the individual has a US address, so the 30% withholding rule for nonresident aliens won't apply.  I recall reading somewhere that a plan can't withhold a distribution for a benefit that has been earned and requested, even if the participant doesn't have a valid SSN -- that doing so generally would violate plan terms.  The plan's route generally would be to make the distribution and do its best to handle withholding and reporting.  One route could be 30% withholding if the individual's circumstances fit the nonresident presumption. Another possible route -- several years ago, a TPA rep told me they sometimes followed the "applied-for" path in the W-2 instructions, which describe entering all zeros when filing the W-2 electronically for a taxpayer who doesn't have an SSN but who has supposedly applied for one (the instructions then discuss later issuing a W-2c when the individual actually gets the SSN and informs the plan sponsor).  I assume the idea in following this W-2 rule is that the 3405 withholding rules say that, generally, the 3402 wage withholding rules apply except if 3405 has its own rule, and so they follow the W-2 instructions in this no-SSN situation for filing the 1099-R.  I don't recall if the TPA rep said anything though about whether the IRS or SSA eventually comes knocking if there's no follow-up corrected 1099-R issued with a correct SSN.

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