James Winston Kim, Saving Our Future: Why Voluntary Contributions to Retirement Accounts Are Reasonable Expenses

• Jurisdiction: United States,Federal
• Publication year: 2011
• Citation: Vol. 26 No. 2

SAVING OUR FUTURE: WHY VOLUNTARY CONTRIBUTIONS TO RETIREMENT ACCOUNTS ARE REASONABLE EXPENSES

INTRODUCTION

For decades, there has been an intense debate on whether voluntary contributions to retirement accounts are per se unreasonable expenses in bankruptcy and must be included in the calculation of a debtor's ability to pay under chapter 13.¹This issue has enormous consequences for consumers, yet

Congress and the courts have failed to come up with a definitive answer. The split among the circuit courts has only widened since passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), in which Congress declined to clarify the matter.

The question of voluntary retirement contributions has important implications, particularly in two situations: 1) determining whether a filer has abused chapter 7 bankruptcy protection, and 2) how much of a chapter 13 filer's income must be devoted to the repayment of creditors. Because debtors must be left with enough resources after bankruptcy to support themselves and their dependants, the treatment of voluntary retirement contributions is critically important to millions of people who file bankruptcy every year.

However, there is no clear consensus among the courts on how to deal with this critical issue, causing confusion for even those who will never file for bankruptcy.²BAPCPA created two distinct tests for determining chapter 7 abuse: the "means test" under Sec. 707(b)(2), and the "totality of the circumstances test" under Sec. 707(b)(3). In the post-BAPCPA era, only the Ninth Circuit Court of Appeals has taken up the issue of whether voluntary retirement contributions are per se unreasonable, but the court expressly limited the scope of its decision to the means test.³With regards to the totality of the circumstances test, no appellate court has expressly ruled on the handling of voluntary retirement contributions, leaving the lower bankruptcy courts without clear direction. This has resulted in disparate treatment of debtors' retirement accounts even within individual districts.⁴

In fact, only one circuit has offered any guidance on how to treat voluntary retirement contributions in the totality of the circumstances test. In Hebbring v. Trustee, the Ninth Circuit Court of Appeals concluded that voluntary retirement contributions were not per se unreasonable and must be evaluated on a case-by-case basis.⁵Although this case arose prior to the effective date of

BAPCPA, the Court used this opportunity to recommend a future course under

BAPCPA.⁶

This Comment will argue that a case-by-case analysis of voluntary contributions to retirement accounts comports best with the policies of the bankruptcy system and the intentions of Congress. Courts that adopt the per se rule that voluntary retirement contributions are never reasonably necessary fail to consider the implications of their holdings, especially in light of the current economic crisis coupled with the impending retirement of tens of millions of workers from the baby boom generation.⁷Part I will show that the Congress has made a conscious and extensive effort to encourage private savings for retirement, and that barring voluntary contributions to retirement accounts is contrary to those efforts. Part II will introduce the mechanics of bankruptcy and explain changes made by BAPCPA. Part III will detail why the per se rule is a judicial invention that has no basis in the Bankruptcy Code, is contrary to the intentions of Congress, and is counter-productive to those courts' own stated objectives. Finally, Part IV will outline possible solutions to this crisis that best fulfill the desires of the government and the people.

I. CONGRESS'S INTENTION IS TO ENCOURAGE WORKERS TO CONTRIBUTE TO

THEIR OWN RETIREMENT SECURITY

A. Saving for Retirement: In the Nation's Best Interest

With the nation facing the impending retirement of tens of millions of "baby boom" workers, retirement funding has become an important concern of the government. The current retirement security framework consists of a three-part system: 1) the broad public federal program that is Social Security;

2) private savings, which represent "an individualistic program dependent principally upon . . . self-reliance;" and 3) employer-sponsored pension plans, which often involve voluntary employee participation.⁸

Workers cannot rely on Social Security benefits alone to support their retirement. Even for minimum wage earners, Social Security benefits only replace about 71% of their pre-retirement income.⁹Because Social Security and Medicare benefits are largely considered inadequate to properly support a person in retirement, Congress has encouraged workers to rely more on the other two parts of the retirement system and contribute to their own retirement funds.¹⁰Congress's clear interest in protecting pension plans and encouraging retirement savings is shown in the statutes, which have created ERISA,¹¹

Keogh plans,¹²and IRAs.¹³Denying a debtor the ability to contribute reasonable amounts to these retirement funds contradicts Congress's clear intent to encourage self-funded retirement.

1. Decline of Defined Benefit Plans

Until the early 1970s, the "traditional retirement plan" primarily consisted of employer-sponsored defined benefit plans.¹⁴These plans were entirely funded by the employer and required no additional contributions from the employee. These plans required the employer to make annual payments to the fund sufficient to ensure the participants would be provided with a fixed benefit annually upon the retirement year, offering a high level of retirement security.¹⁵

The number of employers offering defined benefit plans has decreased dramatically. In the 1970s, approximately 62% of the workforce was covered by defined benefit plans, compared to only 18% of the workforce in 2006.¹⁶

Furthermore, the defined benefit plans that remain do not provide the same levels of retirement support offered in the past.¹⁷This shift in retirement sponsorship has placed a greater burden on individuals to prepare for their own retirements. The court in In re King emphasized that "[t]he decreased availability of defined benefit plans over the last thirty years underscores the necessity of self-funded retirement planning."¹⁸Alarmed with the decreased availability of these defined benefit plans, Congress has fostered the growth of self-funded retirement plans with special tax advantages and protections.¹⁹

2. Employee Retirement Income Security Act

The Employee Retirement Income Security Act of 1974 ("ERISA") was enacted by Congress as a response to the growth of private employee benefit plans.²⁰Congress recognized that private pensions can make up an important component of retirement savings; prior to the vote on ERISA, Senator Jacob

Javits of New York stated:

This legislation will make better pension plans and undeniably, better pension plans will make a significant contribution to the economic security of large numbers of older people who need a much more realistic level of living in retirement. Even a substantially liberalized

Social Security could not do the job the private pensions can do.²¹

The purpose of ERISA was to "correct the perceived inadequacies of many benefit plans, prevent employer abuses, and assure stability of benefits."²²

Therefore, the goal of Congress was to encourage workers to make contributions to pension plans by ensuring that those retirement benefits would not be subject to confiscation due to the participant's financial misfortune,²³and that workers would actually receive a defined pension benefit promised to them upon retirement.²⁴

The scope of ERISA was very broad and encompassed all "employee benefit plans" established or maintained by employers or employee organizations.²⁵Moreover, Congress promoted ERISA accounts by attaching special tax advantages to these accounts and encouraging employers to expand coverage to a broader range of employees.²⁶To obtain tax exempt-status as an ERISA-qualified account, a retirement plan must meet two requirements: 1) contain both anti-alienation and anti-assignment clauses,²⁷and 2) unequivocally prohibit creditor access to plan funds.²⁸These two requirements act to prevent the bankruptcy estate from acquiring any interests in the benefit plan, since bankruptcy attachment is subject to all restrictions enforceable under applicable non-bankruptcy law.²⁹Therefore, federal labor and tax laws generally shelter ERISA plan benefits from state law attachment, execution, and seizure to satisfy a participant's debts.³⁰

The U.S. Supreme Court supports this position, holding that ERISA- qualified pension plan assets of a debtor are outside the reach of creditors in bankruptcy.³¹Furthermore, some courts have held that even retirement plans that are in violation of ERISA may enjoy the anti-alienation provisions enforceable against the bankruptcy estate as long as they were drafted to comply with the ERISA provisions.³²

These comprehensive protections of ERISA assets demonstrate the government's overriding concern that a debtor's retirement be properly supported, and that the interests of retirement security outweigh those of creditors in bankruptcy.

3. Keogh Plans

In 1962, Congress passed the Self-Employed Individuals Tax Retirement

Act,³³which provided for a special retirement plan for sole proprietors and self-employed individuals (including partners in a partnership).³⁴Called a Keogh plan, or an H.R. 10 plan, this retirement plan is maintained by the individual according to the requirements set forth in Treasury Regulation

Sec. 1.401(e)-1 to -3.³⁵Keogh plans come in two forms: 1) a defined contribution plan in which the participant makes regular payments and receives the cash account balance upon retirement, or 2) a defined benefits arrangement, in which the participant receives a fixed benefit which is funded over the participant's working life.³⁶Both forms allow tax deductions for current...