How to distribute vested benefits owed to illegal aliens?

[JDuns]

We have found a vested participant was not legally working in the US. However, we have determined that she has a vested right to receive these benefits (just as she has a right to a final paycheck reflecting wages for her actual work).

The question then becomes what to do with her vested account:

(1) Pay her benfeit and report the distribution using the inaccurate SSN - I am very uncomfortable with this option.

(2) Tell the participant that no distribution will be made until she presents us with a valid SSN or TIN. (So long as the participant has a balance in the plan, we must pay admin fees so this option is not ideal).

(3) Do number (2) but then treat her as a lost participant (even if we know where to find her) and forfeit her benefits to the plan, to be restored if she later presents her valid SSN or TIN. The problem with this is how to handle the required withholding and reporting on 1099-R and SSA on form 5500.

Does anyone have any other suggestions or opinions on the options listed above?

[Appleby]

Sounds like you have a bigger issue- it is illegal to hire illegal aliens.

You cannot treat her as lost, as she is not ( by definition of the regs). Remember that you are required to follow certain procedures for lost participants, for which the results must show you are unable to locate the participant

Regarding the valid SS#, since she is an illegal alien, she cannot obtain a SS#. She may however be able to obtain an ITIN.

http://www.irs.gov/individuals/article/0,,...d=96287,00.html

http://www.irs.gov/businesses/small/intern...d=96696,00.html

[jquazza]

Why don't you just treat him/her just as you would a foreign beneficiary? Send the distribution with US tax withholding according to the tax treaty of the country he/she is from.

[Appleby]

Assuming this is an option-the withholding must be a minimum of 30 percent, even if the treaty rate for the country of residence is less that 30 person… the reduced treaty rate is not available to a nonresident alien who does not have a valid TIN.

[2muchstress]

Maybe I'm thinking in too simple of terms - if this person was not eligible to be working for you because she was an illegal alien, then she could not be eligible to enter the plan.

Treat her as an ineligible participant, and then your document should tell you what to do when you include somebody who was not eligible.

[Mike Preston]

You are. Your actions would disqualify the plan. There is no provision for disenfranchising this person from their benefits other than the normal provisions of a lost participant being able to be forfeited if the document so provides.

[david rigby]

As is often the case, one can find help by searching these Message Boards. For example,

http://benefitslink.com/boards/index.php?showtopic=16873

[Guest OscarD]

I agree with Mike above. Our legal department looked into similar issues last year and pointed out the following potential issues dealing with undocumented plan participants:

An undocumented worker is afforded all the rights and privileges of U.S. law by virtue of being on U.S. soil (although such individual may be subject to deportation). This is even more true if such individual eventually becomes documented as is probably the case with an employee requesting a correction of his retirement plan records and or SSN or corrected TIN.

Treating the individual as ineligible does not work since the person is not excludable on account of having sources of income within the USA. Forfeiting all rights and disregarding prior service may violate a worker's rights under ERISA as follows: 1) By not recognizing the past service for employees who have subsequently become legally documented residents (or having valid work permits), the employer may be preventing the worker from participating in the plan for a period during which he may be eligible based on his actual service.

The best approach is to offer the individual in question the guidance to obtain a valid TIN via form W-7 and arrange to distribute the vested account balance using the foreign withholding rates. If the individual claims reduced withholding (below 30%), a valid TIN is necessary.

The ideal here is to follow the golden rule: treat the person the way you would you like your situation to be handled if you were an alien in a foreign country.

Oscar

[david rigby]

Might need tax treaty: http://www.irs.gov/pub/irs-trty/

[GBurns]

Why not just continue the tax treatment that you were previously doing for this now ex-employee?

You deducted taxes and reported under this "improper" SS # so if you do the distribution and report using the same "improper" SS # you would be providing a completed audit and reporting trail for the IRS and SSA. The credits and debits all end up in the same place.

If you do otherwise you will have reported to the IRS and SSA two (2) separate items that have no relationship.

The employee no longer contributes and no longer will work for you. The SS# that got a tax break gets some tax withheld to offset it. Case balanced and closed.

[Appleby]

GBurns- may not work- The IRS has stepped is program on identifying invalid SS#- and employers and other payors are required to take the necessary steps to obtain a correct SS# from the employee/plan participant/IRA owner.

Maybe this is how JDuns became aware of the fact that the SS# is invalid????

[Guest Robin Vatalaro]

A further consideration.......... The IRS has begun (or at least has said they will) imposing fines on employers who use incorrect SS#'s on tax reporting forms.