Monday, July 25, 2016

Bankruptcy: IRA Exemption in Chapter 7

     The United States Bankruptcy Court in Alexandria, in the case of In Re Hasse, ruled that a federal employee who participated in the federal thrift savings plan may claim an unlimited exemption in an individual retirement account, despite the objection of the Chapter 7 trustee.
     The IRA, valued at $100,000, was claimed exempt under Virginia Code §34-34. Virtually all the debtor’s other assets were either encumbered by liens or were exempt, with the result that the IRA was the only asset potentially available for the payment of creditor claims. At issue in this case was the Virginia General Assembly’s decision to amend Virginia Code §34-34 in 1999 by adding subsection H, which provided that an individual who claimed an exemption under federal law for any retirement plan established pursuant to §§ 401, 403(a), 403(b), 409 or 457 of the Internet Revenue Code (“IRC”) shall not be entitled to claim the exemption under this subsection for a retirement plan established pursuant to §408 or §408 A of the IRC. The thrust of the amendment was to give a debtor who had no other tax-qualified retirement plan the right to an unlimited IRA exemption but to deny the unlimited exemption to a person who was covered by such a plan. By giving a person who was not covered by an ERISA-qualified plan the right to an unlimited IRA exemption, such a person would be put on an equal footing with an employee who was a participant in an ERISA-qualified plan.
     The Bankruptcy Court found that a federal thrift savings plan account, while it is similar to, and for tax purposes is treated exactly like a private employer 401(k) plan - was nevertheless not subject to all the regulations governing §401(k) plans. The question was therefore whether, for the purpose of applying §34-34(H), a thrift savings plan account should be treated as a “retirement plan established pursuant to” §401 of the IRC. If so, the debtor was not entitled to a further exemption for his IRA; otherwise, he could exempt it in full.  
     The trustee took the position that Congress, by treating the thrift savings plan for tax purposes in the same fashion as 401(k) plans, sufficiently equated the two for the purposes of applying Virginia Code §34-34(H). Debtor took strenuous exception to that argument and points out that 5 U.S.C. §8440 only governed the tax treatment of thrift savings plan contributions and distributions. The Bankruptcy Court noted that not only did the enabling statute mandate compliance with the “requirements” of §401(k), it expressly exempted it from compliance with two of those requirements.
     The Bankruptcy Court found that the trustee’s argument ignored the words chosen by the Virginia General Assembly. Those words were very precise. The Bankruptcy Court ruled that a debtor was entitled to an unlimited exemption in an IRA unless the debtor was a participant in, or beneficiary of, a plan that is “intended to satisfy the requirements of” and is “established pursuant to” certain specific sections of the IRC. Although the thrift savings plan operates like, and enjoys the tax benefits of, a 401(k) plan, it was not a 401(k) plan and was not subject to all the “requirements” of a 401(k) plan. The Bankruptcy Court stated that for whatever reason, the General Assembly chose not to define “retirement plan” in such a way as to embrace, not only plans “established” under the enumerated sections of the IRC, but also plans treated for tax purposes like such plans.
     Prior the enactment of Virginia Code §34-34(H), only a limited exemption was available in Virginia for IRAs. The Bankruptcy Court found that the statute plainly intended to expand that exemption. The ability of people to provide adequately for their old age is obviously a matter of great public importance, and it is certainly reasonable that the General Assembly would want, as a matter of sound public policy, to protect savings set aside for that purpose.
     Accordingly, the trustee’s objection was overruled and the debtor’s exemption was allowed.

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