Individualized 401(k) plans??? Help a.s.a.p

[Guest STLGiant]

Sun American and AIM are touting this new offering. One thing I found funny was the mention of bankruptcy protection under ERISA. I thought one man plans (without any employees other than a spouse) were not subject to Title I only to Title II.

Ergo, is this a misinterpretation by two vendors? Has anything changed regarding Title I bankruptcy issues for either sole propreitorships, one-man corporative entities OR is this a change if we have a one man 401(k)

Any sites would be greatly appreciated! Thanks!

[E as in ERISA]

I don't have a cite. But I agree with your conclusion.

[actuarysmith]

Ditto-

I don't have a cite, but I agree with your analysis. It has always been my understanding that a qualified plan had to cover employees other than owners to be afforded asset protection from creditors under ERISA.

I think that this is probably a misinterpretation by the vendors.

[Alonzo]

Your cite is DoL Reg. 2510.3-3(B) & ©.

Incidentally, the restrictions in that regulations really apply only to plans that cover a 100% owner and his spouse and partners in a partnership. Since the reg does not use constructive ownership principles (as are found in the controlled group/ 5% owner definitions in the IRC), I can see somebody marketing an evasion around these rules that works.

[Guest STLGiant]

o.k. so let me understand this...

Since the regs don't specifically address this a loophole exists that allows for a one man 401(k) OR a two person 401(k) (so long as the second person is the spouse) to have bankruptcy protection under ERISA??

I still don't understand this since Title I NEVER applied to sole propreitorships. My understanding of Title I of ERISA was that it applied only to employee benefit plans. As there are no "employees" in this equation, the sole propreietorship is not entitled to bankruptcy protection...

Is anyone aware of a PLR that might have been issued on this? I haven't seen anything on this to-date.

[Alonzo]

I don't know what these guys are marketing.

But it strikes me that a corporate entity could find itself a 1% owner -- who is a member of the family but not the spouse -- who is not the business owner, and slip around the rules. A non-corporate sponsor could cover sonmeone who is not a partner or the spouse, and pay them a nominal salary some service or other.

This does not sound like the sort of consulting done by an insurer. But if someone is real concerned about the situation, this is something that could be looked at. (Note -- I am talking from the top of my head. Anyone who is interested in trying something like this should see a professional advisor, not a message board post.)

[Guest STLGiant]

Understand, but don't necessarily agree to your last post EXCEPT to the fact that one should definitely seek legal counsel before proceding with a one-man 401(k) plan.

The DOL site (easily linked via BenefitsLink) under DOL 2510 expressly outlines that having "employees" is truly the key as to whether or not Title I applies.

The purpose of my original post is that two vendors are offering this "design" and touting that there is bankruptcy protection. Unless there is proof otherwise, I think that kind of advertising is the type that is likely to get both those companies and their clients into a bankruptcy court debate should a sole propretor ever become bankrupt.

Bottom-line: Bankruptcy protection was NEVER designed for HR-10, Keogh or one-man corporate plans that didn't cover employees.

[Alonzo]

Agree with your last post in most repects. People who want bankruptcy protection clearly need to:

1. Find themselves an employee to cover; or

2. Find themselves another person to become a part-owner in the business.

It happens, however, that that person could be Grandpa or Junior.

#2 only would work if the business is corporate, as a partner is not deemed an employee, regardless of the number of partners.

What I do not know is how the courts/regulators are going to traet a situation where it's evident that the new employee or owner is cosmetic window dressing. That's why you need a pro.

[mbozek]

Retirement benefits of sole propreitors and sole owners of corporations are not protected from creditors in bankruptcy under Patterson v. Schumate. Thus it is up to each circuit ct to decide whether the non alienation provisions of the IRC offer protection from creditors under the Bankruptcy law to a sole owner. See In re Raymond Yates, 2002 WL 597034, the Sixth circuit held a sole shareholder's retirement benefits are not excluded from his bankruptcy estate because such person is considered to be the employer, not an employee. Hiring a nominal employee to make the plan subject to ERISA would not work since the bankruptcy law has provisions to prevent the defrauding of creditors and judges have broad powers to seize assets. In Yates there were three other participants yet the ct held that the owner's benefits could be included in the bkcy estate.

[Alonzo]

Hmm...don't think I 'd try a "find employees" approach in the 6th circuit, then.

I have to say, looking at the case (a.ka. Hendon v. Yates , 287 F.3d 521), and the precedents cited, that this is an unimpressive performance by the judges dictated by earlier unimpressive performances by earlier judges. I also note this passage:

"In their opening brief on appeal, the appellants argue that the Fugarino decision departs from a plain reading of ERISA, conflicts with advisory opinions of the Department of Labor, and is contradicted by the caselaw of eight other circuits. But these arguments belong in a petition for rehearing en banc; the three judge panel before which this appeal is currently pending has no authority to overrule Fugarino. "

Sounds like someone is looking for an excuse to overrule the controlling precedent.