What action should be taken when it is discovered that participants ar

[John A]

The specific situation is:

Illegal aliens supplied false social security numbers to employer. These individuals participated in the plan and received contributions. The plan happens to be an ESOP plan.

Common sense (always dangerous to use in this industry) tells me that the money should be forfeited and used to reduce other contributions. But I do not know what gives the plan permission to do this.

Should this be treated as an operational error and corrected under SCP (Rev. Proc. 2001-17)? The plan did nothing wrong based on the false information provided to the employer.

Has anyone else run into something like this?

[PMC]

Had the same question back on 11-30-00 under the 401(k) board and the response was they are participants unless the plan excluded them. That would be an attractive provision in the plan for the IRS to review - "... excluding all employees who are considered to be illegal aliens."

I don't know what that employer eventually did.

[david rigby]

I agree with philip.

To me, common sense says that giving false SSN (or any other data) does not change the employment relationship, and hence would not alter whether they are participants.

[Guest]

our office decided the following:

the ee in question probably has been 'shipped' back to wherever. he probably can't be located. send the distribution with 100% withholding to the IRS and let them refund the tax difference to some lucky individual who actually owns the soc sec number. sort of like 'rental on the use of my soc sec number'.

[Greg Judd]

Originally posted by pax

To me, common sense says that giving false SSN (or any other data) does not change the employment relationship, and hence would not alter whether they are participants.  

I may be missing something, but substantive misrepresentation is actionable in most contractual situations. I'd say the employees' intentional misrepresentation of identity, as a ruse to obtain the job in the first place, does indeed change the employment relationship, & could be argued to change the employment relationship.

[Guest Ray Williams]

I agree that employment is a key issue. In order to be a participant in a Plan, you must be an "Eligible Employee". If the person employed not legally employed, are they an "Eligible Employee?" Also, who would be the employee, the unknown person who actually worked, or the person who's ID was used, but who did not work for the Plan Sponsor?

A separate issue is what is the proper remedy. I would first look to Federal law, first for employement, and then to determine the proper handling of funds of an falsely documented bank account holder, or any other person with funds subject to Federal law that had falsely identified themself.

I suspect that this is not an ERISA question, but rather a question for counsel with Federal expertise.

[MGB]

Sorry, I do not have an answer. But, I have had similar experiences.

In the early '80s I consulted to a Fortune 100 conglomerate. A subsidiary of a subsidiary of a previously acquired company had a few hundred employees and decided to terminate their DB plan. Lo and behold, when the parent company and I stepped in to facilitate the termination, we found out it didn't have a few hundred...it had over 3000 employees eligible to participate (some with many years of service). All of these were illegal aliens. This was not just a case of their providing false information, the employer was knowingly doing this as an accomplice to the arrangements. Besides greatly ticking off the parent company (all of these companies are household names), they went ahead with the termination (originally very overfunded...now underfunded) and went ahead and included all of these people. Whether or not they had to or not was never questioned...they just did it.

Of course, since then, we have had a lot of new legislation on green cards, employer responsibilities, etc., so I would imagine the legal environment of the employment relationship (and whether there is one) has greatly changed.

[david rigby]

The orginal question posed a situation where there were employees supplying false data. That, in itself, is not an ERISA issue. It very well might be an employment issue, but the qualified plan is unaffected until the employment status changes.

What if the EE is fired? If not vested, no big deal. If vested, then the ex-EE is probably entitled to the benefit earned. Looks to me like that person was a legitimate participant.

[Greg Judd]

Originally posted by pax

The orginal question posed a situation where there were employees supplying false data.  That, in itself, is not an ERISA issue....If vested, then the ex-EE is probably entitled to the benefit earned.  Looks to me like that person was a legitimate participant.

Can't agree. How can one legitimately participate if one illegitimately became an employee? If the person was only an employee by virtue of fraud, they weren't eligible to be a participant in the firm's benefit plan. So, they couldn't "really" accrue any benefit. Rationally, it's a do-over.

Further, if our legal system says otherwise, our legal system is defective. Only my opinion, of course.

[Guest Ray Williams]

Which person is the "participant?", the one that actually worked, or the one whose ID was used? I don't believe that there was a " participant." This may be a situation where the IRS would actually agree that any employer contribution made was due to a mistake in fact, and therefore refundable to the employer. The more difficult question, is what to do with any deferrals. The employer does not know the identity of the person who deferred, but does not for certain that the person who's ID was used is not entitled to the money, there, What do you do with the deferrals?

[david rigby]

Disagree.

There may be dishonesty, perhaps fraud. But that is between the ER and the EE, not the plan. The plan does not define "legitimate employee". The plan relies on the plan administrator to supply DATA in the determination of an eligible employee, then the plan uses that data to determine which employees are eligible. Just because there was fraud does not mean that the person was not an employee. If that person somehow "illegitimately became an employee", the employer cannot reverse that action, reverse paychecks, reverse the filing of W-2s.

BTW, just because the person supplied a "false SSN" in the process of getting hired, does not mean that this SSN already belongs to someone else. Might be a non-existent number.

[Guest Ray Williams]

Again- who is the "EE", the unknown person who worked, or the person who's ID was used? The plan can only accept deferrals from " Eligible Employees". The " participant" whos ID was used did not work for the ER, and therefore was not entitled to any compensation. Without compensation, there can be no deferral percentage, match or profit sharing component. Therefore the Plan has funds that do not belong in the Plan. How are those funds to be removed, and who should receive them?

[Mary Kay Foss]

I was consulted by a client who had the following situation. Her illegal alien husband had worked for a company for a number of years and used her social security number. She went to work for the same company (using the same SSN) and participated in the same plan as her husband. When she left after 2.5 years, she got an extremely large retirement distribution. She was thrilled and spent it.

She later was sued by the employer to recover the plan funds that were intended for her husband and entered into a payment plan to repay the money. She was angry that the 1099R showed the entire distribution she received instead of what she was entitled to; the company's ERISA attorney said that the 1099R was correct and that she would make a Claim of Right calculation for each year she made payments back to the plan. She hired me to amend returns to

In the meantime IRS sent a notice because she did not pay tax on the entire 1099R amount. She wrote IRS a note and said that pursuant to a lawsuit she was paying it back. The IRS thanked her and removed the assessment. She terminated her relationship with me because she had solved all her tax problems herself.

Her husband still has no green card and continues to accrue benefits in the plan. Who says truth isn't stranger than fiction?