Question 100: What action should be taken when it is discovered that participants are in a plan due to supplying false information supplied by illegal aliens to the employer (fake social security numbers)? These individuals participated in the plan and received contributions. What should be done with the money contributed for these "participants?" For plan purposes, should the illegal aliens who worked be considered employees and participants, even though they were not legally employed? Should this be treated as an operational error and corrected under SCP?
Answer: We start with the notion that the common law definition of employee is the basis for determining if someone is an employee for plan purposes. That common law definition, with all its various factors, does not consider whether someone is in America legally or not. In other words, if someone born and raised in this country would be considered an employee, then an illegal alien performing the same duties under the same conditions will also be considered an employee.

ERISA does not contain any exclusions for illegal aliens. IRC 410(b) does allow a plan to exclude nonresident aliens without U.S.-source income, but that does not apply here. These workers definitely have U.S.-source income. They earned it by working in this country for the employer and being paid a wage for their services.

I assume the plan does not contain a clause excluding from participation persons who are not U.S. citizens or who do not have a green card. (I�ve never seen such a clause.) Even if it had one, these workers would have to be counted in determining whether the minimum coverage test of IRC 410(b) was satisfied.

So, in the absence of such a clause, if these individuals were eligible to participate before you knew that they had misrepresented their eligibility for employment, then they were eligible to participate notwithstanding that misrepresentation. If the plan covered all employees, or all employees in a particular job classification, then they are eligible under the terms of the plan and are entitled to their vested accrued benefits, the same as with any other employee.

Hence there is no operational error to correct. The plan has been administered in accordance with its terms. The workers were employees and entitled to coverage.

Issues relating to employees, including a detailed discussion of those factors which are relevant in determining that status, are discussed in Chapter 2 of my book, Who's the Employer?.

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Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

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