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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Income that becomes available to debtors following the repayment of a 401(k) plan loan is projected disposable income that must be paid to their unsecured creditors and may not be used by the debtors to begin making voluntary contributions to the plan, according to the U.S. Court of Appeals in Cincinnati (CA-6).
Chapter 13 bankruptcy petitions
Debtors filed Chapter 13 bankruptcy petitions. At the time the petitions were filed, the debtors were eligible to participate in their employers' 401(k) plans, but were not making contributions. However, the debtors were in the process of repaying loans from the plans.
Under proposed Chapter 13 reorganization plans, the debtors wished to begin making contributions to the 401(k) plans once their plan loans were repaid. The Chapter 13 trustee objected to the proposed reorganization plans, maintaining that the proposed contributions to the 401(k) plans could not be excluded from the debtors' projected disposable income that was to be available to creditors because the contributions were not being made at the time the petitions were filed.
A Bankruptcy Court rejected the trustee's position. However, a Bankruptcy Appellate Panel reversed, holding that the exclusion from the property of the estate and disposable income for contributions to a qualified plan under 11 U.S.C. 541(b)(7) applies only where the debtor is making contributions at the time of the bankruptcy petition. Therefore, the post-petition income that becomes available following the repayment of the plan loans could not be excluded from the property of the estate or from the disposable income available to creditors under Chapter 13.
Projected disposable income under Bankruptcy Code
Chapter 13 of the Bankruptcy Code allows debtors to retain their property if they agree to a court-approved plan to pay creditors from their future disposable income. However, if a trustee of the plan or an unsecured creditor objects, the plan may be confirmed only if the debtors contribute all "projected disposable income" to the plan for payment to unsecured creditors (11 U.S.C. 1325(b)).
The Bankruptcy Code does not specifically define projected disposable income. However, Bankruptcy Code Sec. 541(a)(1) states that a bankruptcy estate includes all legal and equitable interests of the debtor in property "as of the commencement of the case." Bankruptcy Code Sec. 541(b)(2) (as enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2006 (BAPCPA)) modifies the general rule, providing a limited exclusion from the bankruptcy estate for amounts withheld by an employer from an employee's wages for contributions to a qualified retirement plan. Chapter 13 (11 U.S.C. 1306) incorporates Sec. 541, but specifically includes property interests (i.e., retirement plan contributions) which arise post-petition in the property of the estate. The Sixth Circuit initially noted that Chapter 13 (11 U.S.C. 1322(f) (as enacted by BAPCPA)) excludes plan loan payments from a debtor's disposable income, but does not provide an express exclusion for voluntary 401(k) plan contributions. In addition, neither Chapter 13 (nor Official Form 22C) list voluntary retirement plan contributions as "reasonable and necessary expenses" that are deductible from gross income.
Bankruptcy Code Sec. 541(b)(7) does exclude plan contributions from disposable income. However, the fact that the provision is included in the larger context of Sec. 541(a), indicated to the court that Sec. 541(b)(7) only excludes from the bankruptcy estate property that would otherwise be excluded under Sec. 541(a). Reading the provisions together, the court concluded that Sec. 541(b)(7) only excludes from the bankruptcy estate contributions made before the date of the bankruptcy petition. The Congressional intent underlying 541(b)(7), the court explained, was to clarify that pre-petition retirement contributions do not constitute post-petition disposable income, and was not to create an exemption for newly arising post-petition income. Thus, income made available once a debtor's loan obligations are fully satisfied must be committed to the debtor's Chapter 13 plan for distribution to creditors and may not be used to make voluntary plan contributions.
Source: In re Seafort (CA-6).
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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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