We have recently determined that their are approx 100 illegal aliens in our 401k plan. I know that their pre-tax contributions are theirs, but how about any matching contributions? Can these now be forfeited to the plan.

Is there something in the plan that says they must be US citizens to participate? I doubt it. I don't see why they shouldn't be treated the same as anyone else.

No - but if they don't have valid SSN's, how would they be set up in our recordkeeper's system. Under a dummy SSN? How does this affect any tax reporting?

Are they not non resident aliens without valid immigration documents permitting them to work in the US? If so they would still be entitled to the employer contributions under the plan the same as any other employees becase all participant benefits are protected by ERISA. If they are using suspect SS # then there is an issue of how to report the benefits, not a question of the participant's rights to the amounts in the account. I think you need to determine whether the SS # are indeed false- If so you should contact the IRS on what to do-- The IRS is not concerned with whether a person is permitted to work in the US -- they are only concerned with collecting taxes.

Actually, our plan does state that "any employee who is a nonresident alien with no US source income shall not be eligible to participate in the plan".

Well, is it US source income or not? I'd be willing to bet a lot of money that it is US source income.

It sounds like you should be having a talk with the folks in your company that hired the illegal aliens in the first place. You could just tell that they are making your life difficult!

If you have illegal aliens working for your company, I suggest that you not worry about the 401(k) matching funds. There are many much larger and expensive issues to worry about first.

How does a plan handle false SSNs when the worker is gone (just ahead of the INS)? One suggestion above was to ask the IRS. Has anyone had any experience?

If participants leave just ahead of the INS, what do you need the social security number for? Are you saying that they have vested balances that you expect to pay out? Or that you paid out already and found the SSN to be in error?

I have a hard time believing that illegal aliens will keep you informed about their future addresses. And I find it harder to believe that they would opt in to a 401(k) by making salary reduction contributions, or that they would stay long enough to vest uner most plans. So even though I have administered many plans with illegal aliens participating in them, I have not had to deal with this issue.

I used to administer a plan for commercial farms in Arizona. The hardest problem for me was when an illegal alien came back after a break in service and was employed under a new name and SSN. (This happens regularly after an amnesty program especially.)

Yes, I am assuming that a benefit is due the individual, that the SSN is incorrect and that it is unlikely that the plan will ever be able to find the participant, illegal or not. Even some "legal" folks just don't want to be found and fake SSNs may be part of the pattern.

Once you arrive at this point, by whatever means, what do you do with a vested benefit? And just to make it more urgent, assume the plan is terminating.

I had to deal with this on a terminating DB plan. The employer had reported about 400 participants regularly in annual valuations. The compensation data provided was often a rate or an estimate, not usable in actual benefit calculations (we did not do any administration - just actuarial, this was a subsidiary of a Fortune 100 client). When we went to terminate, we required them to provide us with five years or more of correct compensation. When all of the correct information was gathered at the multiple local plants, guess what....there were actually 3800 participants, most of the extras being illegal aliens.

The only "fortunate" thing about this is that they were there and could be given cashouts. No need to track anyone down. However, we never did find out if there were terminated vesteds that we similarly didn't know about.

Basically, the local management never reported anyone on an ongoing basis that they thought would not become vested.

Note that if you fill out an SSA with incorrect SSNs that nothing happens.

One solution is to do 100% withholding to the IRS but this wont work if the SS # is false. Another option is to forefit the funds to the Plan if the participant cannot be located subject reinestatment of the benefit if the participant turns up at a later date. If the plan terminates then the participant would have to make a claim against the Plan administrator but I am not sure the there would be any individual liability especially if the employee did not leave a forwarding address.

MGB: So, how many Schedule B's did you have to amend?

To David Shipp: Some good suggestions made. We have arranged for IRA rollovers without individuals signatures. Place the amount due in a rollover and let it escheat to the state.

To MGB: Why was the participant count reduced by the illegal aliens? I know of no law that permits discrimination against illegal alien employees, forfeiture of benefits or otherwise. Of course the plan could have specified that non-citizens are not eligible, but then it would have to go through the more difficult non-discrimination testing, the the D-letter from IRS would be caveated.

VEBA: Why whould the plan sponsor want to transfer the funds to an IRA so that the state benefits from the failure to find the participants instead of forfeiting the funds if the participants cannot be located and allocating the funds among the remaining participants?

If an individual is an illegal alien, both ERISA and the INternal Revenue Code permits plans to return contributions to employers when those contributions were made due to a "mistake of fact". Most plan documents contain a mistake of fact provision that permits the return of such contributions within one year of the date the contribution was made to the plan. The mistake of fact provision should apply in this situation because the employer employed this individual (and permitted them to participate in the plan) based on the individual's representation that they were legally able to work in the US.

Since the IRS considers deferral contributions to be "employer contributions", both deferrals and "real" employer contributions (such as an employer match or profit sharing) attributable to this false participant could be returned to the employer if they are not more than a year old and the plan contains the appropriatte provision. Any older employer contribtuions could be treated as a forfeiture.

Any thoughts?

As pointed out above, no provision of ERISA permits treatment of illegal aliens any different from any other employees. A plan may exclude salaried or union members those who earn more than $45,000 per year or any other identifiable group so long as that exclusion does not discriminate in favor of the highly compensated. But if plan provisions do not specifically provide for exclusion of a group of employees, there is no basis for denying them benefits and no basis for your "mistake of fact" argument. And no amendment can reduce an employee's accrued benefits.

There is no basis for your spurious claim that this is a "false participant". [In 30 years of practice, I have never seen a plan document defining that term and exclusing them.] Sorry, but your jingoistic bigotry cannot be justified under an ERISA plan.

Note that it is just as illegal for employers to hire illegal aliens as it is for them to work. The employer's hands may not be clean in the situation presented.

If you feel the way you do (and I don't), you should put language into your plan documents that excludes aliens with US source income, even though you will receive a caveated determination letter and have to pass the general test. Then you won't have to concoct lies to try to justify your own illegal behavior.

Thanks for your response. My comments above were given to me from our plan's recordkeeper/trustee. I was curious as to the feedback I would get from this.

vebaguru: I think you read a little much into the term "false participant" to conclude that there is "jingoistic bigotry" and the "concoct(ing) (of) lies."

I like the rhetoric, though.

Call Will Smith and Tommy Lee Jones, they know how to take care of those illegal aliens!