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11. Exclusions from estate property.
Educational retirement accounts; state tuition and prepaid programs.
A new paragraph (b) (5) is added to § 541, providing that funds placed in an educational retirement account at least 365 days prior to bankruptcy filing, within the limits established by the Internal Revenue Code, and for the benefit of a child or grandchild of the debtor, are excluded from the debtor's estate, with a $5000 limit on funds contributed between one and two years before the filing. A new paragraph (b) (6) similarly excludes similar contributions to qualified State tuition programs, as defined in the Internal Revenue Code.
Contributions to employee benefit plans, retirement funds.
Another new exclusion from estate property, § 541 (b) (7), applies to employee contributions to ERISA-qualified retirement plans, deferred compensation plans, tax-deferred annuities, and health insurance plans. In the past many exclusions were not allowed based upon differing laws in various state jurisdictions. The Supreme Court in Rousey v. Jacoway recently upheld the exemption of IRA accounts and this provision deals with the myriad of transitions, rollovers and the hodgepodge of state law exemptions. New § 522(b)(3)(C) permits the exemption of retirement funds to the extent they are exempt form taxation under the Internal Revenue Code ("IRC"). This includes pension, profit-sharing and stock bonus plans, employee annuities, IRA accounts (including Roth IRA's) deferred compensation plans of state, local government and tax exempt organizations, and certain trusts. Until Rousey many debtors who once had exempt assets in the form of previously protected retirement accounts found themselves in litigation when these assets were rolled over into vehicles (such as IRA's) which were not exempt. The new exemption is found in § 522(b)(3) which covers exemptions under state and federal non-bankruptcy law and may be exercised even if the debtor's state has opted-out of the federal exemption scheme. Accordingly, § 522(b)(3) (C) will be controlling over any state law that does not permits an exemption of retirement funds or provides less overall protection. Many states do not have statutory protections for retirement accounts or protect some and not others. This same provision was added as to the new § 522(d)(12) permitting such exemptions when the debtor is operating under the federal bankruptcy exemption scheme.
Establishing whether retirement funds are exempt does in fact require that a test or analysis be completed in order to qualify. In order to obtain tax exempt status various vehicles must usually receive what is known as a "favorable determination" by the IRS. This provision is codified under IRC § 7805 and all funds which have received a favorable tax determination are presumed to be exempt for purposes of § 522(b)(3) (C) and § 522(d)(12). If the subject funds have not received a favorable tax determination they will still be considered exempt if: (1) no prior unfavorable determination has been made by a court or the IRS; or (2) the retirement fund is in substantial compliance with IRS guidelines or the debtor is not responsible for any failure of the retirement fund to be in substantial compliance. Further retirement accounts continue to qualify for the exemption if they are directly transferred from a tax-exempt fund into another qualifying fund or account. The exemption further continues if there has been a distribution that qualifies as an eligible rollover distribution in accordance IRC § 402(c) or is otherwise a distribution from a fund or account that is tax exempt and is deposited into an allowed account not later than sixty (60) days after the distribution.
The new § 522(n) imposes a $1 Million cap on the value of a debtors total interest in IRA accounts (Established under either IRC § 408 or 408A) that an individual debtor can claim as exempt under § 522(b)(3)(C) or § 522(d)(12). This limit is problematical for high net worth debtors but it does not apply to simplified employee pension account under IRC § 408(k) or amounts contributed as the result of rollovers, or earnings based on other similar retirement plans under IRC §402 and 403. These provisions are some of the very few pro-consumer provisions of the new law and they provide some certainty as to exempt status. It is unclear whether there will be an "investment effect" to these provisions as exempt accounts may be viewed as an alternative to a real estate.
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