Post-Petition 401(k) Contributions

Posted by NCBRC - August 8, 2012

Two recent cases came out the wrong way on the issue of whether a debtor may deduct post-petition contributions to his 401(k) from calculation of disposable income. In re Parks, No. 11-1366 (B.A.P. 9th Cir. August 6, 2012), and In re Jenkins, No. 11-16960 (Bankr. E.D. Tenn. July 5, 2012). Both cases turned on interpretation of section 541(b)(7) which provides:

(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 –

(1) to –

(i) an employee benefit plan that is subject to Title I of the Employee Retirement Income Security Act of 7974 or under an Employee Benefit Plan which is a government plan under § 414(d) of the Internal Revenue Code of 1986;

(ii) A deferred compensation plan under § 457 of the Internal Revenue Code of 1986; or

(iii) A tax deferred annuity under § 403(b) of the Internal Revenue Code 1986;

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

The courts adopted a very narrow reading of this provision finding that the exclusion from the estate property and from disposable income both referred only to pre-petition contributions to the 401(k). The reasoning of these cases is flawed for a number of reasons. First, as pointed out in the most recent edition of Colliers, the courts’ “conclusion makes no sense, because any funds in the hands of the employer as of the chapter 13 petition date would never be considered to be disposable income, which only includes income received by the debtor after the petition is filed. Funds that have already been paid to the debtor’s account are dealt with, and separately protected by, the exemption provisions of section 522(b)(3)(C), (d)(10)(E) and (d)(12).” This reading finds additional support in Congress’s consistent protection of retirement funds, through legislation in both the Bankruptcy Code and the Social Security Act, and the general policy of providing for citizens once they have reached retirement age and are no longer able to earn income.

The genesis of much of the analysis finding that post-petition contributions are not deductible from disposable income is the case out of the Bankruptcy Court of Montana, In re Prigge, 441 B.R. 667 (Bankr. D. Mont. 2010), and, more recently, the dictum in the Sixth Circuit case of Seafort v. Burden (In re Seafort), 669 F.3d 662 (6th Cir. 2012), where the court expressed the “awkward” conclusion that in section 541(b)(7), Congress intended to exclude from disposable income only voluntary contributions to 401(k)s that were made pre-petition. By adopting this narrow interpretation, courts eviscerate the bulk of the protection afforded by the text of section 541(b)(7).

Jenkins transcript

Parks opinion


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