Defined Benefit Plan/Bankruptcy/Something Smells

[Guest Steve McIntire]

I am an attorney in Oregon and I do not know much about retirement accounts, but something here does not seem right and I am hoping to elicit some direction. A small business owner set up a defined benefit plan. The business failed and he rolled over into a "Roll Over IRA" a significant sum he advanced on a home equity line of credit, filed for bankruptcy and is surrendering the home, which no longer has the value necessary to make my client whole. The debtor lists in his bankruptcy schedules he made $80,000 income for 2007 and $0 for 2008. The roll over occurred in early 2009. I am unsure he had the money in the "defined benefit plan" prior to the "roll over." I have requested documentation to prove or deny this fact. To me, advancing on a line of credit significant sums and then filing bankruptcy while attempting to take advantage of the exemptions at the expense of my client does not seem right. Any advice/direction would be helpful.

[David MacLennan]

A transfer from a home equity line of credit to a DB plan would not be a rollover. It sounds like it may be that the transfer was intended to satisfy a funding requirement (DB plans can have a funding requirement in any given year, and more often than not do). Some avenues you may want to look at:

1) Is the plan qualified? (proper plan documents and amendments and/or favorable determination letter from IRS).

2) Do (non-spouse) employees participate in the DB plan? If so, it is an "ERISA qualified" plan and such plans have absolute protection (e.g., OJ Simpson)

3) Was the contribution required? Request the actuarial reports. The Plan's Enrolled Actuary determines the funding amount each year.

4) Normally, funding is done by the business sponsoring the plan. If not, and the contribution came from personal funds, this perhaps could bring into question the status of the "contribution".

This guy may have gotten some very good advice to shelter his assets in the DB plan.

[JAY21]

I agree with David. The paper trail if the business owner did it (correctly) would be likely be (1) take out home equity loan personally, (2) make loan to the business of some/all of the home equity loan proceeds (look for supporting loan documents), and (3) the business then contributes the money to the pension plan. If he went through those steps, in addition to David comments, it might be tough to challenge him on this.

If the business is not incorporated this transaction could be a bit murkier to track in my opinion without the clear dividing line of corporate accounts vs. personal asset accounts.

[Guest Steve McIntire]

I agree with David. The paper trail if the business owner did it (correctly) would be likely be (1) take out home equity loan personally, (2) make loan to the business of some/all of the home equity loan proceeds (look for supporting loan documents), and (3) the business then contributes the money to the pension plan. If he went through those steps, in addition to David comments, it might be tough to challenge him on this.

If the business is not incorporated this transaction could be a bit murkier to track in my opinion without the clear dividing line of corporate accounts vs. personal asset accounts.

Thanks for the replies. I am pretty sure I can show the company was insolvent prior to the advance to the home equity loan.

When there is a DB plan, can the plan be paid to the employee who then has 60 days to roll the funds into a qualified plan? And, if so, does it matter if the funds were not really in a DB plan, meaning, the plan was never funded prior to advancing in the loan?

Also, if there were funds in the plan, does it matter if the funds, when rolled out, were placed into a checking account and consumed for things like living, cars, etc. and then, later, the line of credit was advanced to fund teh roll over IRA?

Thanks for the advice.

[masteff]

When there is a DB plan, can the plan be paid to the employee who then has 60 days to roll the funds into a qualified plan? And, if so, does it matter if the funds were not really in a DB plan, meaning, the plan was never funded prior to advancing in the loan?

Yes, it matters 110%. If no funds whatsoever in the DB plan, then nothing could have been distributed from the plan, so then it can't be rolled over by simple definition of rollover eligible distribution.

Also, if there were funds in the plan, does it matter if the funds, when rolled out, were placed into a checking account and consumed for things like living, cars, etc. and then, later, the line of credit was advanced to fund teh roll over IRA?

From the financial perspective of the rollover, the money is fungible. However, the 60-day rule is pretty exacting, so verify the date it left the plan and the date it went into the IRA.