United States: Considerations For Plan Sponsors Who Discover Unauthorized Workers In Their Retirement Plans, Part 2: Tax Reporting, Withholding, And Missing Participants

With immigration enforcement in the news, some employers may be wondering what responsibilities they have related to their retirement plans, if an employer discovers that an employee lacks documentation to demonstrate they are authorized to work in the United States legally.

In Part 1 of this series, I addressed the consequences under ERISA of undocumented workers participating in an employer retirement plan. In this second and final part, I will consider the tax reporting and withholding rules as they may apply to workers who are unauthorized to be present in the United States. Similar to ERISA, the Internal Revenue Code ("Code") does not make a distinction between authorized and unauthorized workers, but special attention should be paid to the unique circumstances that unauthorized workers may create.

Factors to Consider Under the Code and for Tax Reporting Purposes

Under the Code, which does consider the concept of "residency" for tax reporting purposes, there is no consequence for legal or illegal immigration status. Although the immigration laws of the United States refer to aliens as immigrants, non-immigrants, and undocumented aliens, the tax laws of the United States refer only to resident and nonresident aliens.

Federal law defines residency for tax purposes in a way that is very different from the immigration laws. Under the Code, all aliens (i.e., non-U.S. citizens) are considered to be nonresident aliens unless they are "Lawful Permanent Residents" under the immigration laws (i.e., they have a "Green Card"), or they pass what is known as the "Substantial Presence Test" (a numerical formula that measures days of presence in the United States.)

For tax reporting purposes, individuals (whether by virtue of being citizens, Green Card holders, or based on the Substantial Presence Test) are considered to be "U.S. Persons." All others are non-U.S. Persons. In many circumstances, even if an unauthorized immigrant entered the country illegally, they will qualify as a "U.S. Person" because they have stayed in the United States long enough to meet the Substantial Presence Test.

Tax Reporting and Withholding for U.S. Persons

The reporting requirements for payments to U.S. Persons are usually familiar to retirement plan sponsors and third party administrators. Distributions are reported on Form 1099-R, and the plan sponsor is required to file Form 945. Proper withholding depends on whether the distribution is an eligible rollover distribution, a periodic distribution (e.g., an annuity), or a nonperiodic distribution (e.g., a corrective or hardship distribution). There are, however, some additional complications if the plan sponsor is missing the participant's Social Security Number ("SSN") or has discovered it is invalid. This is frequently an issue when a sponsor discovers one or more unauthorized worker.

  • Eligible rollover distributions are generally subject to 20% federal income tax withholding (unless they are paid as a direct rollover or are less than $200, in which case they are not subject to withholding).
  • Periodic distributions generally are withheld the same as wages based on a participant's Form W-4P. If the sponsor does not have a valid SSN or Individual Tax Identification Number ("ITIN") for the participant, it must withhold as if the participant were single claiming no withholding.
  • Nonperiodic distributions are subject to 10% withholding, unless a participant claims an exemption from withholding. If the sponsor does not have a valid SSN or ITIN for the participant, it must withhold 10% regardless of the election.

In some cases (particularly in the unauthorized worker context), a plan sponsor may not be aware whether a participant is a U.S. Person. Treasury Regulations allow the sponsor to assume it is making a payment to a U.S. person if the sponsor has a valid SSN for the payee and a valid mailing address either in the U.S. or a foreign mailing address in a country with which the U.S. has an income tax treaty that exempts pension payments from income.

Tax Reporting and Withholding for Non-U.S. Persons

Again, frequently, unauthorized workers will qualify as U.S. Persons merely based on the amount of time (legally or illegally) they have spent in the U.S. With that being said, it is sometimes the case that a deferred vested participant is no longer a U.S. Person after moving to another country for some time.

If the plan sponsor believes it will make a U.S.-sourced retirement payment (i.e., a retirement payment based on service performed in the U.S.) to a person who is not a U.S. Person, 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 they are a U.S. Person and determine whether they will claim benefits under an applicable tax treaty. A Form W-9 gives the sponsor a record of the participant's name, address, ITIN or SSN, which may allow them to be treated as a U.S. Person, pursuant to the assumption rules discussed above. In case the participant is eligible to take advantage of treaty benefits, they will need to complete a Form W-7.

In the absence of a treaty exemption that provides otherwise, the plan sponsor must withhold at the statutory rate of 30% on the entire distribution to a non-U.S. Person.

Missing or Incorrect SSNs

IRS Publication 1586, "Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs," specifies the steps an employer must take to show reasonable cause and the triggers for doing so. This is a helpful reference any time an employer realizes it is missing or has an invalid SSN/ITIN.

Rules for Missing Participants

Sometimes when an employer discovers an unauthorized alien, or when an employer begins asking questions, the worker stops reporting to the jobsite. To the extent that a participant cannot be located, under ERISA and the Code, sponsors of qualified retirement plans have a fiduciary responsibility to make a reasonable effort to find missing or unresponsive participants. Missing participants are an area of focus for the DOL, and having appropriate processes and procedures can limit liability in that regard.

Such processes might include:

  1. Sending notices to the participant's last known mailing address by certified mail.
  2. Sending notices by appropriate means to any other contact information, such as email addresses and telephone numbers.
  3. Checking the records of related plans and employers.
  4. Checking with the participant's designated plan beneficiary.
  5. Using free electronic search tools (such as internet searches and public record data sites).
  6. Using a commercial locator service, a credit reporting agency, or a proprietary internet search tool for locating individuals.


Tax reporting and withholding rules, while usually familiar to plan sponsors, are complex in of themselves. An additional layer of complexity is added when information is missing or invalid, which is frequently the case when an employer discovers that some of its employees are unauthorized workers. In this case, in addition to retaining an experienced immigration attorney, it is helpful for employers to consult with an attorney experienced in payroll tax and benefits issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions