§ 99.5 — Employee Benefit Plan Contributions

Revised: March 28, 2006

[1]

The second deduction from current monthly income (CMI) on the way to disposable income that is not mentioned in § 1325(b) is buried in the following exclusion from property of the bankruptcy estate in § 541(b)(7):

(7) any amount—
(A) withheld by an employer from the wages of employees for payment as contributions—
(i) to—
(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986; except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2); or
(ii) to a health insurance plan regulated by State law whether or not subject to such title; or
(B) received by an employer from employees for payment as contributions—
(i) to—
(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986; except that such amount under this subparagraph shall not constitute disposable income, as defined in section 1325(b)(2); or
(ii) to a health insurance plan regulated by State law whether or not subject to such title[.]1
[2]

Not unlike the exclusion of pension loan repayments from disposable income in § 1322(f),2 the cryptic statements that the amounts described in subparagraphs (A) and (B) of § 541(b)(7) “shall not constitute disposable income” do not give us all the information we need to make this adjustment with certainty. The conditions for exclusion from disposable income in § 541(b)(7) are quite different from the conditions on the exclusion of pension loan repayments in § 362(b)(19).3

[3]

The exclusion from disposable income in § 541(b)(7) applies to any amount “withheld by an employer from the wages of employees”4 or “received by an employer from employees”5 for payment as contributions to an employee benefit plan, deferred compensation plan or tax-deferred annuity specified in the statute. In other words, contributions to qualified employee benefit plans, deferred compensation plans or tax-deferred annuities are excluded from disposable income whether “withheld” by an employer from the wages of an employee or simply “received” by an employer from an employee.

[4]

Amounts “withheld by an employer from wages” may be relatively easy to determine by looking at a debtor’s pay stubs or the like. But contributions “received by an employer” from the debtor are a broader notion that could be interpreted to include amounts a debtor contributed in the past. In context, § 541(b)(7)(B) was probably intended to insulate from the bankruptcy estate prepetition contributions received by an employer before the petition from employees as payments to qualified plans. Transported into the disposable income context, it is not obvious how debtors should account for contributions received by an employer that were not withheld from wages but that satisfy the conditions for exclusion in § 541(b)(7)(B). It is arguable that the debtor can exclude from disposable income similar contributions to be made in the future whether withheld from wages or not.

[5]

In any case, amounts withheld or received by an employer for payment as contributions to qualifying retirement plans are excluded from disposable income, and debtors must figure out what amount to exclude. This problem is similar to accounting for pension loan repayments under § 1322(f).6 CMI is a monthly amount.7 Disposable income is not a monthly amount—except it is calculated that way in Official Form B22C.

[6]

To exclude contributions to retirement plans described in § 541(b)(7), the debtor has to calculate the “monthly average” of those contributions and enter that amount at Line 55 of Official Form B22C. For purposes of this monthly average, what will be the total amount withheld from wages or received by an employer as contributions, and how is the sum of those amounts averaged? If there are elections available to the debtor that would change the amount withheld, can/should the debtor make those elections before or after the Chapter 13 petition? Does the size of this exclusion from disposable income change if the debtor can elect to increase or reduce amounts withheld or received by an employer? Does an amount qualify for exclusion from disposable income only if it is withheld at the petition? Can the debtor initiate a withholding after the filing of the Chapter 13 case but before confirmation and claim the exclusion from disposable income in § 541(b)(7)? The exclusion from property of the estate for which § 541(b)(7) was designed fits poorly as an exclusion from disposable income in a Chapter 13 case.

[7]

Because contributions to employee benefit plans, deferred compensation plans and tax-deferred annuities as described in § 541(b)(7) do not involve incurring debt, debtor’s counsel faces no prohibition under § 526 against advising the debtor to initiate or increase contributions to a retirement plan before filing a Chapter 13 case. New § 541(b)(7) presents Chapter 13 debtors an opportunity to voluntarily establish wage contributions that will benefit only the debtor and that will reduce amounts that must be paid to unsecured creditors to satisfy the disposable income test in § 1325(b). BAPCPA contemplates this result as part of a larger effort to protect retirement plans in bankruptcy cases.


 

1  11 U.S.C. § 541(b)(7) (emphasis added), discussed further in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2  Property of the Chapter 13 Estate—Changes by BAPCPA.

 

2  See 11 U.S.C. § 1322(f), discussed in § 491.1 [ Pension Loan Repayments ] § 99.4  Pension Loan Repayments.

 

3  See 11 U.S.C. § 362(b)(19), discussed in § 58.10  Pension Loans Exception after BAPCPA  and § 99.4  Pension Loan Repayments.

 

4  11 U.S.C. § 541(b)(7)(A).

 

5  11 U.S.C. § 541(b)(7)(B).

 

6  See § 491.1 [ Pension Loan Repayments ] § 99.4  Pension Loan Repayments.

 

7  See 11 U.S.C. § 101(10A), discussed in §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.