Do Pre-Bankruptcy 401(k) Deferrals Have to be Returned?

[Alf]

A sponsor has filed bankruptcy and creditors want last remittance of 401(k) deferrals made BEFORE bankruptcy returned to employer. I think it was supposed to be an avoidable preference. It was 401(k) only and it was remitted prior to bankruptcy, so I don't see how it can revert back to employer (antialienation or plan assets??), but I can't find any authority specifically dealing with 401(k) salary deferrals. Who is correct? Does anyone have a cite I can rely on?

[mbozek]

If the deferrals were made by the employees then the employer's creditors have no claim to the funds because the funds were never assets of the employer. Under the DOL plans asset rules the funds are plan assets once they are segregated from the employer's general assets. Who is advising the creditors on this ridiculous claim?

[Alf]

I think that matching/profit sharing contributions are plan assets once they are paid to a trust, but I understand that they can be challenged somehow in bankruptcy. That is not my issue, of course, but I don't think I can get by arguing that they are plan assets without identifying a special rule for 401(k) deferrals. 401(k) deferrals apparently aren't treated like salaries or profit sharing/match, so there must be a special backruptcy rule or theory specifically for these. Any other ideas?

[mbozek]

Alf. The creditors of the bankrupt employer are only entitled to property that was owned by the employer. Salary reduction contributions were never the employer's funds because they represent compensation paid to the employees. The plan admin needs to retain counsel to explain why the deferrals are not subject to the claims of creditors. But why hasnt the bankruptcy trustee been notified?

In addition, plan assets are not subject to the claims of the employers creditors and under ERISA the fids must administer the plan for the exclusive benefit of the participants.