Potential Participant SSN Issue

Employee requested a COVID-related distribution from 401(k) plan. Custodian has come back and told the employer that the SSN provided for the employee "does not exist according to the IRS database" and they cannot issue a distribution without a valid SSN. I presume this was actually determined using the Social Security Number Verification System (SSNVS), but am not positive. There's no suggestion that this is a duplicate SSN or actually belongs to another person, etc.  Employer has had no issues with wage reporting for the SSN. Employee insists the SSN is correct. 

Question - Can the custodian (a bank) refuse to make the distribution from the plan based on the info from the SSNVS? I know they need an SSN for the 1099, but they have a number to use that is not linked to anyone else. Does a bank have an obligation to verify an SSN before making payment?

I don't know if they have an obligation or not but I know of plenty that do it.

Will the bank not give this person any choice but provide a good SSN that is different?

I mean if this person produces a birth certificate, SSA card and photo id it seems like that ought to settle things.  

I know the banks we work with that do these checks give us a number of solutions.   Ask the bank what the menu of solutions are.  

The bank is a fairly small regional bank and has not been very helpful.  The contact at the bank told the plan sponsor that either the employee is lying or there is an issue with the IRS. Which suggests to me that he/she is not very familiar with this issue as the IRS has nothing to do with this...  

I guess I'm trying to figure out how much leverage the bank has here. The employee has presented a Social Security card that appears valid on its face. Can the bank require additional documents from the employee and/or refuse to process the distribution based on information they got from the SSNVS? 

I am not a lawyer but in theory the bank works for the client.   The Plan Administrator and Trustee have the final word if someone should get paid. 

However, experience has taught me many banks fear real or perceived regulatory risk more than a customer threatening to leave and go to a different bank.  

I work in HR and have an account with the SSA for their Business Services Online service.  There was a lot of paperwork to get access to it but once I did it made my life tremendously easier.  We are decentralized and we do find typos in SSAs from time to time, not to mention the occasional fraudulent number.

https://www.ssa.gov/bso/bsowelcome.htm

A few years ago, I volunteered to help our health and welfare people with their ACA reporting when the IRS kicked out hundreds of our submissions, claiming that the SSNs were wrong.  When I submitted the so-called "bad" SSNs to the SSA online they all came back as correct.  IRS was clearly wrong and I would not rely on IRS-provided info.