401k Non Mandatory - will Trustee stop it?

[LadyInTheRed]

Actually, I'm talking about 11 USC 541(b)(7)(A)...

11 USC 541(b) Property of the estate does not include --

(7) any amount--
(A) withheld by an employer from the wages of employees for payment as contributions

This is why I think that this is well settled in the 11th Circuit (Florida, Georgia, Alabama). I would hope that the other Districts could actually read the text of what constitutes property of the Estate in 11 USC 541... and not embellish. But, alas, that's what makes practicing bankruptcy law so much fun for Des.

Thanks for the clarification. At first I was going to say that 11 USC 541, defines what is and is not property of the estate, not what is DMI. But, the last part of 541(b)(7)(A) says

except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325 (b)(2)

They sure do hide that detail on the exclusion from DMI. Sometimes I think laws are intentionally written to make them difficult to understand. I wish congress would form a committee specifically to rewrite legislation to make it easier to follow. But, I guess that would probably result in years of litigation fighting over whether the rewrite misinterpreted the original law.

Des, is the case at the 9th circuit BAP over how much of a 401k contribution is allowed or whether it is allowed at all? Do you have the case name or number?

[justbroke]

I wish congress would form a committee specifically to rewrite legislation to make it easier to follow. But, I guess that would probably result in years of litigation fighting over whether the rewrite misinterpreted the original law.

It's Congress... what more would you expect from them? Remember, the BAPCPA was essentially written by the credit lobby and handed to Congress. They passed it off a a "Consumer Protection Act"... where it was creally a "Creditor Protection Act".

Des, is the case at the 9th circuit BAP over how much of a 401k contribution is allowed or whether it is allowed at all? Do you have the case name or number?

I'd like to know this too. I need something to read during the hurricane since I won't be traveling to Maryland tomorrow.

[justbroke]

"I believe District-Az is binding in Az. and can be used in Cal for support but not if Cal. District is in opposition. Only my opinion."

So, basically, the Judges don't need to look to other District Court decisions for their own District. I'm certainly persuaded by that argument.

[despritfreya]

Des, is the case at the 9th circuit BAP over how much of a 401k contribution is allowed or whether it is allowed at all? Do you have the case name or number?

The decision that was appealed held that NO voluntary contribution was allowed. . .

I apologize in advance for the length of this post. I tried to redo the search that found the case that is on appeal. No luck there. I have a copy of it at the office and will update this post on Monday.

But I did find a case out of California (not on appeal) that breaks down the three approaches to this issue. The following is from the case. I shortened it where I felt I could. You can see the full decision through PACER. There is no charge to download an opinion.

In re McCullers (Bankr. N.D. Cal., 2011) - Memorandum Decision Case No. 10-34281issued June 8, 2011

The principal issue raised in this case is whether section 541(b)(7) authorizes a chapter 13 debtor to deduct voluntary postpetition contributions to a qualified benefit plan in calculating the debtor's disposable income under section 1325(b). I conclude that section 541(b)(7) does not authorize such a deduction.

Debtor proposed a chapter 13 plan under which he would pay $200 per month for 60 months. General unsecured creditors would receive total payments of $7,900, which represents approximately 11 percent of their claims. Debtor would pay the priority support claim of his ex-wife and repay the loan from his 401(k) retirement plan in full outside of the plan. . .

The chapter 13 trustee objected to confirmation of the plan, contending that the plan did not pay to unsecured creditors all of Debtor's "projected disposable income," as required under section 1325(b).

Whether Debtor's plan provides for the payment of all of his projected disposable income turns upon whether Debtor is entitled to deduct voluntary contributions to his 401(k) plan, and amounts necessary to repay money he borrowed from that plan.

Trustee contends that as a matter of law Debtor is not entitled to deduct any voluntary retirement contributions in calculating his disposable income. Trustee acknowledges that under section 1322(f) Debtor is entitled to deduct payments necessary to repay the loan from his 401(k) plan, but contends that the loan will be repaid after 32 months, and that plan payments should be increased once the loan is repaid.

Debtor contends that, under section 541(b)(7), he is entitled to deduct contributions in the maximum amount permissible under a 401(k) plan, and that the total amount deducted over the life of the plan does not exceed the deductions authorized under section 1322(f) and section 541(b)(7). Debtor further contends that his ongoing contributions are reasonable and necessary to provide for his retirement in light of his age and existing retirement savings.

Section 541(b)(7) provides the only means by which an above-median-income chapter 13 debtor can make voluntary post petition contributions to a qualified retirement plan over the objection of a creditor or the trustee. Under section 1325(b)(1), a chapter 13 plan can be confirmed over the objection of the trustee or an unsecured creditor only if the debtor contributes all "projected disposable income" to the plan. The calculation of "projected disposable income" begins with the calculation of "disposable income," which is defined as current monthly income less necessary expenses. For an above-median-income debtor, necessary expenses are limited to those recognized in IRS debt-collection guidelines. Under the IRS guidelines, mandatory retirement contributions are deductible, but voluntary contributions are not. Debtor does not contend that any of the contributions he seeks to deduct are required by his employer. Thus, the question presented is whether the very specific provisions of subsection 541(b)(7), discussed below, override the more general provisions of subsections 707(b)(2) and 1322(b) just described.

The reported decisions on section 541(b)(7) are split among three highly divergent interpretations: (1) that the debtor may continue to contribute at the rate he or she contributed prepetition; (2) that the debtor may contribute the maximum amount permitted under the statute governing the type of plan at issue; and (3) that section 541(b)(7) does not authorize postpetition contributions in any amount.

The Seafort Decision

The highest court to address the issue held that section 541(b)(7) excludes from disposable income postpetition contributions up to the amount of the debtor's prepetition contributions. Burden v. Seafort 437 B.R. 204 (6th Cir. BAP 2010).

First, Seafort concludes that the contributions excluded from property of the estate under section 541(b)(7) are prepetition contributions. That section 541(b)(7) excludes only prepetition contributions from property of the estate is crucial to the issue at hand, because the plain language of section 541(b)(7) excludes from disposable income only "such amount" excluded from property of the estate. . . Next, Seafort notes that section 1306, which addresses property acquired after the petition date in a chapter 13 case, does not exclude postpetition retirement contributions either from property of the estate or from disposable income. . . Finally, Seafort determines that limiting retirement contributions permissible under a chapter 13 plan to the amount debtor contributed prepetition is consistent with legislative intent.

The Johnson Decision

Several bankruptcy courts have held that section 541(b)(7) authorizes a chapter 13 debtor to make voluntary postpetition contributions to a qualified retirement plan up to the maximum amount permitted under the non-bankruptcy law governing the type of plan in question. . .

In re Johnson, 346 B.R. 256 (Bankr. S.D.GA 2006) focuses only on the language stating that the contributions specified "under this subparagraph [i.e. 541(b)(7)] shall not constitute disposable income as defined in section 1325(b)(2)." These decisions, all issued before Seafort, do not address the interpretive puzzle addressed in Seafort: that the amount excluded from disposable income under section 541(b)(7) is plainly linked to the debtor's postpetition contributions.

The Prigge Decision

Finally, one bankruptcy court held that section 541(b)(7) does not authorize a chapter 13debtor to make voluntary postpetition retirement contributions in any amount. In re Prigge, 441 B.R. 667(Bankr. D. Mont 2010) Prigge noted that in enacting section 1322(f), Congress expressly excluded from disposable income all amounts necessary to repay a loan from the debtor's retirement plan, and placed that exclusion within the confines of chapter 13 itself. Prigge noted that Congress did not adopt a similarly broad and unambiguous exclusion for postpetition contributions to a retirement plan. The court concluded from this pattern that Congress did not intend to create any exclusion for postpetition retirement contributions, and that the function of section 541(b)(7) was merely to clarify that retirement contributions withheld prepetition and still in the possession of the employer on the petition date are neither property of the estate nor postpetition income to the debtor.

This court is not persuaded by the Johnson decision. . . Seafort and Prigge are more persuasive than the Johnson because they both limit the amount excluded from disposable income to prepetition contributions. Seafort holds that the debtor is entitled to make postpetition retirement contributions at the rate that the debtor made such contributions prepetition. Prigge holds that the exclusion is limited to the amount that has been withheld by the employer but not yet transferred to the plan as of the petition date. At first glance, Seafort is more persuasive. . . However appealing the result achieved in Seafort, close analysis of the language of the statute suggests that Congress actually intended the much more limited effect recognized in Prigge. . .

CONCLUSION

Trustee's objection to confirmation of Debtor's chapter 13 plan is sustained. In calculating disposable income, Debtor may deduct loan repayments to his 401(k) retirement plan only until that loan is repaid. So long as Trustee or an unsecured creditor objects, this above-median-income Debtor may not make voluntary postpetition contributions to his retirement plan. Debtor promptly shall file an amended chapter 13 plan.

____________________

Des.

[justbroke]

I'm glad I don't live in the 9th Circuit. They seem to insert words where they don't belong. I see that 541 (as in the Georgia decision) clearly says it's not disposable income. How can you change that definition? My personal belief is that 1322's language for the loans was clearly to make sure that they are paid... not that contributions are not allowed. I think, in my Circuit (11th), the general theory on this is that Congress intended to encourage retirement savings through ERISA compliant plans.

I mean, 1322 was just to make sure that the "terms of a loan" under ERISA were not changed since certain types of loans, like loans on primary residences, are specifically "protected" by the code.

Methinks the Judge over-reached. Hopefully the appeals court fixes this.

[mike14]

We had our 341 early this year and were questioned extensively about a $200 / month 401K deduction. The trustee said that these deductions would only be allowed for a spouse whose partner was terminally ill and who had no other reasonable expectation for retirement income.

That doesn't seem equitable since people with defined retirement plans are required to pay into the play at usually a 5-8% level to fund those plans and disposable income is calculated after that % is deducted from their paycheck. Someone with no defined retirement plan should be allowed a reasonable deduction for 401K in the same average percentage range to save for retirement. I guess it must the "voluntary" vs. "involuntary " issue.

[justbroke]

In Florida, we allow the loan payment or the contribution. I think that is the best reading of the law. I consider the loan repayment to be nothing more than a contribution. The fact that it is classified as a loan for purposes of Plan Administration, shouldn't change the fact that Congress specifically excluded 401(k) contributions as "disposable" income.

Hopefully the 9th Circuit and others figure this out since the 11th Circuit is already consistent in the reading.

[IamOld]

We had our 341 early this year and were questioned extensively about a $200 / month 401K deduction. The trustee said that these deductions would only be allowed for a spouse whose partner was terminally ill and who had no other reasonable expectation for retirement income.

That doesn't seem equitable since people with defined retirement plans are required to pay into the play at usually a 5-8% level to fund those plans and disposable income is calculated after that % is deducted from their paycheck. Someone with no defined retirement plan should be allowed a reasonable deduction for 401K in the same average percentage range to save for retirement. I guess it must the "voluntary" vs. "involuntary " issue.

This is nuts!!! So you have to live in a box when you retire?? How is that logical GOVERNMENTAL public policy? Most people have no other retirement!!!