Administration October 25, 2019

Undocumented Workers Become a Missing Participant Problem

Nothing in ERISA says an undocumented worker cannot participate in a retirement plan, but making a distribution to one could be a problem.
Reported by
Art by Brian Stauffer

It can happen and has happened—a retirement plan sponsor discovers an undocumented worker is participating in the retirement plan.

Eric W. Gregory, an attorney with Dickinson Wright in Troy, Michigan, tells PLANSPONSOR he has found that the Affordable Care Act (ACA) has diminished the instances of illegal immigrants obtaining a Social Security number and using it to get employment. “That mismatch between name and Social Security number could go undetected, but, with the ACA, employers send Social Security numbers to the IRS to show an employee has health care coverage, and the IRS is cross checking numbers against names. That has caused a lot of employers to get mismatched information from the IRS and has led to a rising level of employers finding out about false Social Security numbers,” he says.

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According to Gregory, the undocumented worker can’t be kicked out of the retirement plan just because it was discovered he was undocumented. There hasn’t been a lawsuit that has come out to say this, and the Employee Retirement Income Security Act (ERISA) doesn’t have any exceptions for workers who are not legally authorized to work in the United States.

In a blog post, Gregory noted that the Department of Labor (DOL) has taken the position that undocumented or under-documented workers are “employees” under the Fair Labor Standards Act (FLSA) and the Migrant Seasonal Agricultural Worker Protection Act (MSPA), but it has not done so explicitly in the context of ERISA.

“Most retirement plans include a ‘common law’ definition of ‘employee,’ which does not take into consideration whether a worker is authorized to work in the United States,” Gregory wrote.  “Therefore, unless a retirement plan has a specific exclusion for unauthorized workers or workers whose participation arose as a result of fraud, it appears to be inconsistent with both ERISA and plan terms to exclude those workers from participation, or cause them to forfeit their benefits.”

There still are ramifications for plan sponsors, though.

If a current employee is determined to be an undocumented worker, his employment will be terminated.

If an undocumented worker is vested in any retirement benefits, the time for a distribution will come. It may be that the retirement plan requires a cash out of small balances, or a former employee who was an undocumented worker will reach age 70 1/2—the current age at which minimum distributions are required.

In a best-case scenario, described by Gregory in Part II of his blog post, unauthorized workers may qualify as U.S. Persons merely based on the amount of time (legally or illegally) they have spent in the U.S. He said a plan sponsor may consider confirming that tax status by providing the participant with Forms W-8BEN, W-9 and W-7. The Form W-8BEN permits the participant to attest whether he is a U.S. Person and determine whether he will claim benefits under an applicable tax treaty. A Form W-9 gives the plan sponsor a record of the participant’s name, address, individual tax identification number (ITIN) or Social Security number (SSN), which may allow him to be treated as a U.S. Person, pursuant to rules for U.S. Persons. In case the participant is eligible to take advantage of treaty benefits, he will need to complete a Form W-7.

Often, though, an employee who is discovered to be undocumented, doesn’t want to be found, Gregory tells PLANSPONSOR. Or, an undocumented worker has moved, or been deported, to a place outside of the U.S.

According to Gregory, the IRS in audits has recently said plan sponsors can forfeit the retirement benefit of a missing participant and reinstate it if the participant shows back up, but the DOL says that’s a prohibited transaction. He says some employers just wait for the situation to resolve itself, following guidance on trying to locate missing participants.

Gregory points out that if the retirement plan sponsor and recordkeeper do not have a valid Social Security number of ITIN for a plan participant, a distribution cannot be made because one or the other is required for issuing a 1099R to the IRS and the participant. Gregory says it is unlikely for a worker to show back up at his employer saying he applied for an ITIN.

He explains: “When employers are required to make distributions to employees who have provided invalid Social Security Numbers, they are faced with a quandary because Internal Revenue Code Section 6109 generally requires that any person required to file a return, statement, or other document with the IRS must include an identifying number. That identifying number is generally a Social Security Number.”

In order to make distributions that are otherwise required to be made to individuals who have provided a false or incorrect Social Security Number who will not provide an ITIN, some employers have relied on previous guidance from the IRS that relates to W-2s. “That guidance suggests that employers should enter all zeroes in the Social Security Number field of a Form W-2 for reporting earnings for someone who was hired or worked in error when an accurate Social Security Number was not obtained. However, recordkeepers typically do not want to prepare 1099-Rs with missing Social Security Numbers,” Gregory says.

If a plan sponsor has issued a required distribution to an undocumented worker and the check is never cashed, the IRS has recently issued a Revenue Ruling saying plan sponsor’s still have an obligation to withhold and pay taxes on required distributions and report it on a 1099R.

Gregory says, “If a plan sponsor came to me, I would first want to know if it is dealing with a large or small group of employees. I would first suggest the plan sponsor ensure it is following immigration rules and determine whether it knows if the employee has an invalid Social Security number.”

He would first suggest the plan sponsor tell the employee or employees to fill out a Form W-7 to get an ITIN so a distribution can be made. But, he concedes they may not be eligible to get one. Plan sponsors should follow plan provisions with respect to when it is appropriate to make a distribution.

“If the employee doesn’t have a W-7 or if the employee has a balance larger than the automatic cash out limit, the plan sponsor is at the mercy of it recordkeeper about whether it can issue a 1099R,” Gregory says.
Administration October 22, 2019

Mechanics of Implementing a Sidecar Savings Account

Keeping retirement plan contributions rolling in while also allowing employees to save for emergencies.
Reported by
Art by Katherine Streeter

Implementing sidecar savings accounts would allow employees to contribute towards both their emergency and retirement savings.

Linked to a participating worker’s retirement account, the tool would help workers fund a short-term savings account with after-tax contributions (The Employee Retirement Income Security Act [ERISA] does not allow pre-tax savings for emergency accounts). Once employees accrue their desired amount for emergency savings, the remaining contributions would be allocated to their defined contribution (DC) plan account, thus permitting employees to save for both short-term and long-term financial needs.

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Since participants are likely to withdraw dollars from their retirement accounts when emergency expenses arise, incorporating a sidecar account may prevent workers from tapping into their DC plans.

A bipartisan Senate bill introduced in 2018 mentioned sidecar savings accounts to increase access to workplace saving while avoiding retirement account leakage. Though the bill has not passed the Senate since its announcement, firms are currently implementing after-tax approaches to increase emergency savings. In 2018, Prudential Financial, along with nonprofit organization Prosperity Now, presented an emergency savings solution utilizing payroll deductions for after-tax contributions.

To integrate such a solution, plan sponsors may be required to amend their DC plan documents, and/or update their DC plan payroll files, says Harry Dalessio, head of Institutional Retirement Plan Services at Prudential Retirement. Certain recordkeeping systems, such as Prudential’s, immediately permit participants to view emergency savings from their retirement account.

“Plan Sponsors could re-purpose an existing after-tax source or they may want to add a new after-tax source specifically for emergency savings,” he adds. “Prudential’s recordkeeping system, participant website, statements, etc. already have the after-tax source integrated so participants will be able to see their emergency savings within their [retirement plan] account.”

Setting up a sidecar—or emergency—savings account isn’t difficult for plan sponsors, it’s compliance issues behind the mechanics that can be confusing. Obscurity with these savings tools concerns employers, contends Karen Andres, director of Policy & Market Solutions and project director of the Retirement Savings Institute at The Aspen Institute.

“There’s this lack of clarity that really prevents the proliferation of experimentation,” she explains. “Employers are now just trying to feel their way into [sidecar savings], because no one wants to run afoul.”

This trepidation is mostly seen when it comes to directing money from a participant’s paycheck to the savings account. “Plan sponsors are looking to check the boxes with compliance,” says Andres. “We have multiple banking and ERISA laws on the books that just don’t really make it easy to provide this solution.”

Other employers, however, are implementing a manual route to paycheck withdrawals for emergency savings by setting up accounts with banking institutions that allow for manual withdrawals. Others are discovering automatic Fintech solutions in the workplace, and some recordkeepers are offering both the after-tax savings approach and DC plan, side-by-side. 

According to Dalessio, at Prudential, employers update their DC plan payroll files to include the after-tax source. Once the plan sponsor adopts the feature, participants can change their contributions via Prudential’s mobile app or online. Dependent on the plan, set up for sidecar accounts may be simple.

“It’s very minimal because it’s part of the DC plan, so depending on how the plan is set up, the plan sponsor may only need to update its plan documents and/or payroll files,” Dalessio says. 

Since sidecar and emergency savings accounts remain relatively new features in the workplace benefits space, the industry continues to navigate these tools and the regulatory issues that follow. It’s why employers have yet to see many case studies or models of the savings vehicles, according to Andres.

“Plan sponsors are still trying to figure out how to solve for multiple needs at once, and doing so in the context of regulatory and legal lack of clarity,” she says. 

As the industry filters through these models and employers add sidecar savings and emergency savings accounts to their plans, Dalessio asks plan sponsors to consider certain prerequisites to offering such features. First, by adding an after-tax source, plans will be subject to Actual Contribution Percentage (ACP) testing, an annual nondiscrimination test needed to maintain qualified status under ERISA. Because ACP testing ensures highly compensated employees are not being favored by their DC plan, a sidecar savings solution can help plan sponsors pass the test since the sidecar account is geared towards the non-highly compensated employee (NHCE) population.

“However, we recommend reviewing a plan’s testing results to assess any potential impact,” Dalessio proposes. 

Second, employers have the option to provide a company match on after-tax contributions. Plan sponsors should keep in mind that after-tax contributions are still subject to the IRS 415 limit, capping total DC plan contributions to $56,000 in 2019.

Lastly, and in common with any plan design changes is consulting a professional if considering a sidecar savings or emergency savings model. Dalessio concludes: “It’s up to the plan sponsor to work with appropriate ERISA counsel or a plan design consultant to ensure its plan is designed appropriately.”

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