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By Cynthia L. Moore, NCTR Washington Counsel

We would like to report the results of our efforts to protect the retirement savings of bankrupt pension plan participants. As you recall, H.R. 833, the Bankruptcy Reform Act, was passed by the House last year and by the Senate, this year. Although no formal conference committee was ever named, an informal group has completed a final version, which includes the resolution of the issues affecting retirement savings. Approval of the final version is in limbo, however, for two reasons. First, it was to be attached to the conference version of the Federal Crop Insurance bill, but a last minute objection derailed that plan. Second, even if Congress eventually passes it, the President may veto it for reasons unrelated to the retirement savings provisions.

"Good Faith" Exception. This exception relates to a situation when the pension plan in question does not completely comply with the Internal Revenue Code qualification provisions. Under the Senate bill, a debtor plan participant could still protect his/her retirement savings in that situation as long as he/she was not materially responsible for the noncompliance of the applicable rules. Although the House bill did not contain the protection, it was adopted in the final version of the bill.

Cap on Retirement Savings Protected from Creditors. As we reported recently, we worked to oppose such a cap, which was proposed by Senators Charles Grassley (R-IA) and Jeff Sessions (R-AL). The Retirement Systems of Alabama worked closely with Senator Sessions’ office and was able to reach a compromise that carved out a variety of plans, including those provided by governments. The final version of the cap covers only IRAs and Roth IRAs and only if the amounts in the IRAs exceed $1,000,000. (The sliding cap idea, which set lower levels for younger debtors, was rejected.) If a debtor has more than one IRA, all accounts are cumulated to determine whether the cap has been exceeded. Note, rollovers from qualified plans into IRAs would be subject to the cap.

Technical Corrections. We succeeded in obtaining technical corrections. First, the bill makes clear that required (i.e., mandatory) employee contributions are not disposable income and therefore are not available to pay creditors. Second, it clarifies that pension money in transit that ends up in the hands of an entity that goes bankrupt is not included in the entity’s bankruptcy estate. Third, the bill makes clear that plan loan re-payments are not disposable income and therefore are not available to pay creditors. (Some systems allow their participants to take loans against their pension savings.)

For further background on these provisions, view the bankruptcy letter dated April 12, 2000. We appreciate the great support for our efforts and would especially like to thank the Retirement Systems of Alabama for their successful work with Senator Sessions office.