News coverage of the current administration’s enforcement of immigration policies has demanded the attention of the entire country. It should therefore come as no surprise that this issue has permeated every corner of the legal world, and the law governing retirement plans is no exception. What may come as a surprise given the prevalence and immediacy of this issue is the lack of clear guidance on the impact of unauthorized workers on employer sponsored retirement plans.

With increasing frequency, 401(k) plans and other employer sponsored retirement plans are faced with the question of how to handle the retirement benefits of unauthorized workers. Many plan administrators simply deny unauthorized workers their accrued retirement benefits on the grounds that they were obtained fraudulently or under false pretenses and thus should be forfeited. As discussed below, this approach is not without risk.

The legal landscape: uncertainty abounds

The Employee Retirement Income Security Act of 1974 (ERISA) imposes various obligations on those charged with administering retirement plans sponsored by private employers. Among other things, a plan administrator—commonly the employer sponsoring the retirement plan—must discharge its duties “solely in the interest of the participants and beneficiaries and…for the exclusive purpose of…providing benefits to participants and their beneficiaries….”[1] The plan administrator also generally must operate the plan consistent with its written terms.

ERISA does not enumerate immigration status requirements when defining “employee” for retirement plan eligibility purposes. While the Internal Revenue Code permits exclusion of nonresident aliens with no US-source income for certain retirement plan purposes, this exclusion is not relevant under the circumstances: unauthorized workers necessarily have US-source income paid by the employer. Plan documents typically do not address unauthorized workers because the law prohibits their employment.

Given the absence of plan language authorizing forfeiture on the basis of unauthorized status and fiduciary obligations to act solely in the interest of participants and beneficiaries, what support do plan administrators have for forfeiture? Some may view the U.S. Supreme Court’s opinion in Hoffman Plastics Compounds, Inc. v. NLRB as authorizing such treatment. In Hoffman the Supreme Court interpreted the Immigration Reform and Control Act of 1986 (IRCA) to deny unauthorized workers who were victims of a National Labor Relations Act violation from collecting backpay awards.[2] In doing so the Supreme Court noted that awarding backpay for years of work not performed by individuals who only obtained the position through criminal fraud ran counter to the policy of IRCA.

Since Hoffman, however, several courts of appeal have distinguished situations involving claims related to work actually and already performed from the circumstances involved in Hoffman. In a relatively recent decision, the U.S. District Court for the Eastern District of New York also distinguished Hoffman when it determined that a Union Fund was entitled to recover unpaid benefit contributions to a retirement plan related to work actually and already performed by certain unauthorized workers.[3] The Court noted that holding otherwise would incentivize employers to hire unauthorized workers knowing that they would be relieved from many federal employment requirements. These cases, at the very least, inject uncertainty on this issue.

Unfortunately, the Department of Labor (DOL)—the agency charged with enforcing ERISA’s fiduciary standards—has not provided clear guidance on the application of ERISA in this area. While the DOL has taken the position that unauthorized workers are “employees” for purposes of the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Work Protection Act (MSPA), it has made no such pronouncements regarding the application of ERISA.

Now what?

Given the uncertain nature of the law in this area, plan administrators are wise not to simply forfeit an unauthorized worker’s retirement plan benefit without careful consideration and consultation with experienced counsel. The risk of doing so is likely most pronounced in the 401(k) plan setting where workers defer a portion of their pay that they otherwise would have received as taxable wages. These deferrals are clearly tied to work actually and already performed, and thus are distinguishable from the types of benefits denied in Hoffman. Accordingly, until clear guidance is issued to the contrary, the safest approach is to treat unauthorized workers in the same way as any other retirement plan participants.

Of course doing so may present other practical difficulties. While unauthorized workers may be entitled to their accrued retirement plan benefits, the realities of each workers’ legal status can make location and identity verification necessary to pay benefits extremely difficult. Obviously, it would not be appropriate for a retirement plan to pay out any accrued benefits based on a tax identification number that it suspects or knows to be fraudulent. Even in the event of an appropriate distribution, tax reporting considerations can be far more complex for unauthorized workers than for other retirement plan participants. In the end, it may be likely that a retirement plan is eventually forced to treat the unauthorized worker as a missing participant which may lead to forfeiture. Still, this approach may save plan administrators from unwanted interaction with DOL enforcement and the ever-increasing threat of participant litigation.

ENDNOTES
[1] ERISA §404(a)(1)(A)(I)

[2] See Hoffman Plastic Compounds, Inc. v. NLRB, 535 U.S. 137 (2002).

[3] See Trs. of the Pavers & Rd. Builders Dist. Council Welfare, Pension, Annuity & Apprenticeship Skill Improv. & Safety Funds v. M.C. Landscape Group, Inc., Dkt. No. 12-cv-0834 (E.D.N.Y) (2015).
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Photo of David Uhlendorff David Uhlendorff

David is an associate in the Employee Benefits & Executive Compensation practice group. He focuses his practice on assisting public and private companies of all sizes with the design, implementation and maintenance of tax-qualified pension, 401(k) and profit-sharing plans, non-qualified deferred compensation plans…

David is an associate in the Employee Benefits & Executive Compensation practice group. He focuses his practice on assisting public and private companies of all sizes with the design, implementation and maintenance of tax-qualified pension, 401(k) and profit-sharing plans, non-qualified deferred compensation plans, change in control plans and agreements, equity compensation arrangements, and health and welfare benefit plans.

Photo of Edward Redder Edward Redder

Ed is a Partner in the firm’s Employee Benefits & Executive Compensation practice group. He previously served as Assistant General Counsel of Nationwide Insurance Company where he advised the company on various employee benefit matters including ERISA fiduciary and qualified retirement plan issues.