Lump Sum Rollover from IRA to Annuity Not “Premium”

Posted by NCBRC - February 16, 2015

The Eighth Circuit found that the debtor’s individual retirement annuity funded by a lump sum rollover contribution from his IRA was properly exempted from his chapter 7 bankruptcy estate. Running v. Miller (In re Miller), No. 13-3682 (8th Cir. Feb. 13, 2015).

Miller used funds from his IRA to make a lump sum purchase of an annuity. In his subsequent bankruptcy he claimed the annuity as exempt under section 522(b)(3)(C). The trustee objected to the exemption arguing that the annuity was not a qualified individual retirement annuity under IRC section 408(b) because it did not meet the two IRC requirements that, 1) the premiums not be fixed, and 2) that the annual premium not exceed the dollar amount in effect under section 219(b)(1)(A). Specifically, the trustee argued that the initial lump sum payment was a “fixed premium” and that it exceeded the statutory limit of $6,000. The trustee conceded that if the initial rollover contribution is not a “premium” the annuity qualifies for the bankruptcy exemption.

The bankruptcy court overruled the trustee’s objection to the exemption. The BAP affirmed.

On appeal, the Eighth Circuit began its analysis with section 522(b)(3)(C) which exempts “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section . . . 408 . . . of the Internal Revenue Code.” Section 408 provides that individual retirement accounts and individual retirement annuities are exempt from taxation. Funds generally retain their exempt status when transferred from one exempt account to another.

To determine whether the initial contribution to the annuity was a “premium” the court turned to the IRC. Although the IRC does not define “premium,” section 408(b)(2)(B) links maximum premium payments to section 219(b)(1)(A). The latter section defines a qualified retirement contribution as “any amount paid in cash for the taxable year by or on behalf of an individual to an individual retirement plan for such individual’s benefit.” In contrast, section 408(d)(3) defines a rollover account as “any amount paid or distributed out of an individual retirement account” that is paid into an annuity within 60 days. Where section 219(b)(1)(A) refers to new contributions, and 408(d)(3) refers to the initial purchasing sum, the court concluded that Congress did not intend to equate the two, and only the new contributions are “premiums.” The IRC differentiates between the rollover contribution and a premium payment for tax purposes as well. Excess contributions made to an annuity during any given year may be taxed while the rollover contribution is specifically excluded from the calculation of total contributions.

This statutory construct makes clear that an initial rollover contribution from an IRA to purchase an individual retirement annuity is not a premium.

The court also rejected the trustee’s argument that in order to qualify as an exempt annuity under section 408(b)(2)(B), the debtor must make “multiple annual premiums.” The court found that that section merely governs the maximum amount of such premiums if they are made, it does not require that they be made.

Because the initial rollover contribution was not a “premium” within the meaning of the relevant sections of the IRC, the debtor’s annuity was properly exempted from his bankruptcy estate. See also In re LeClair, 461 B.R. 86 (Bankr. D. Mass. 2011) (cited by the Miller court as the only other court to address this issue and reaching a similar conclusion).

NACBA filed an amicus brief in support of the debtor.

Miller 8th Cir Opinion




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