Contributions to Retirement Plan Excluded from CMI

Contributions to an employee retirement plan are to be excluded from the calculation of current monthly income rather than deducted from disposable income in the Means Test. In re Vu, No. 15-41405 (Bankr. W.D. Wash. June 16, 2015).

Anh-Thu Thi Vu, an above-median debtor, had a Thrift Savings Plan (TSP) through her employer to which she made regular pre-petition contributions. When she filed for chapter 13 bankruptcy she entered $877 on Line 41 of the Means Test, Form B22C-2, for “all qualified retirement deductions,” resulting in monthly disposable income of $74 on Line 45. Based on this figure, she proposed a plan under which she would pay $80 per month.

The trustee objected, arguing that the debtor could not properly deduct her payments to the TSP from her disposable income calculation on the Means Test. The trustee also argued that the plan was not proposed in good faith because unsecured creditors stood to receive approximately 9% of the money owed them, while if the debtor devoted her retirement funds to the plan, unsecured creditors would be paid in full.

The trustee’s objection triggered section 1325(b)(1)(B)’s requirement that the debtor devote all of her projected disposable income to the plan. “Disposable income” is defined as “current monthly income… less amounts reasonably necessary” for the maintenance or support of the debtor or the debtor’s dependents. The hanging paragraph to section 541(b)(7)(A) provides that property of the estate does not include amounts withheld by an employer for contribution to a retirement plan “except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2).” Courts are divided on how to treat voluntary contributions to retirement plans, with some finding that those contributions are never to be included in disposable income, some finding that they are excluded from disposable income only to the extent that they were being contributed prior to the bankruptcy filing, and others finding that they are to be included in the disposable income calculation.

In re Prigge, 441 B.R. 667 (Bankr. D. Mont. 2010) reached the third holding, reasoning that contributions to a retirement fund are not reasonably necessary to the debtor’s maintenance and support under section 707(b)(2), and had Congress intended that retirement contributions be excluded from disposable income it would have made that clear. In so holding, the Prigge court largely ignored section 541(b)(7)(A)’s hanging paragraph. In re Parks, 475 B.R. 703 (B.A.P. 9th Cir. 2012), agreed with the holding in Prigge and attempted to reconcile Prigge’s result with the language of section 541(b)(7)(A)(i)’s hanging paragraph by explaining that “such amount” means that only pre-petition contributions shall not constitute disposable income, and that “except that” simply clarifies that the voluntary retirement contributions excluded from property of the estate are not post-petition income to the debtor.

As discussed by the bankruptcy court, the Prigge line of cases was questioned in 5 COLLIER ON BANKRUPTCY, ¶ 541.23[1] (16th ed. rev.), as illogical because disposable income is based on post-petition income rather than pre-petition assets. Collier “concludes that the reference to § 1325(b) in § 541(b)(7)(A)(i)’s hanging paragraph ‘removes any doubt’ that qualifying voluntary retirement contributions ‘are to be excluded from the disposable income calculation.’”

In an attempt to reconcile Parks and Prigge, the court in In re Bruce, 484 B.R. 387, 394 (Bankr. W.D. Wash. 2012), reasoned that 541(b)(7)(A)’s hanging paragraph excluded retirement contributions from current monthly income in the six months prior to bankruptcy and, therefore, those contributions would not go toward the calculation of disposable income.

The Vu court agreed, concluding that contributions to a retirement plan should not be included in the calculation of CMI during the six-month look-back period, and, therefore, would not be included in the calculation of disposable income which relies on CMI. The court explained: “Using this approach, Debtor would not have treated her voluntary retirement contributions as a deduction in Line 41 of her Form B22C-2; rather, she should have subtracted those contributions made in the six-month pre-petition period in calculating CMI. In practice, this will result in virtually the same projected disposable income as Debtor’s approach because she made the same contributions during each of the six months used to calculate CMI.”

Turning to the issue of good faith, the court found that voluntary contributions to a retirement plan are properly subjected to a good faith analysis, but it declined to reach a finding on that topic, instead instructing the parties to attempt a reconciliation based on its order concerning the proper calculation of current monthly income.

Vu Bankr WD Wash opinion