403(b) Interests Excluded from Bankruptcy Turnover

The U.S. Bankruptcy Court for the Southern District of Ohio has ruled the interests of seven debtors in Employee Retirement Income Security Act (ERISA) Section 403(b) plans did not have to be turned over to the Chapter 7 trustees of the debtors’ estates.

The court found that the 403(b) plan sponsored by OhioHealth Corp. qualified as a trust that is excluded as property under bankruptcy law.

The court noted in its opinion that a property interest is excluded from property of the estate under the code if the interest is a beneficial interest in a trust; there is a restriction on the transfer of the interest; and the restriction is enforceable under applicable nonbankruptcy law.

The “legal question before the Court involves the interpretation of Retirement Plan documents,” the opinion said. When applying the three-pronged test to the OhioHealth plan, the court noted the plan document established a trust and trustee for the plan. The OhioHealth plan also includes a restriction on the transfer of the interests of its beneficiaries.

Finally, the court determined the plan was an Employee Retirement Income Security Act (ERISA)-governed plan, so the transfer restriction was applicable under ERISA’s anti-alienation provisions.

The same test, however, did not apply to a 403(b) plan in which a seventh debtor participated. The 403(b) plan sponsored by Grady Memorial Hospital for which annuities were provided by The Variable Annuity Life Insurance Company (VALIC) did not constitute a trust, the court determined.

However, the court denied for a different reason the motion that the participant’s interest in the VALIC plan be turned over to the Chapter 7 trustee of her estate. The trustee did not prove that the participant was entitled to a distribution under the VALIC Plan, and since the participant did not have a right to her interests in the plan, they could not be turned over.

The court noted that in the VALIC plan participants do not hold legal title to the monies invested in their account, nor do they hold title to any shares in the mutual funds purchased by VALIC. Further, a participant’s right to the 403(b) benefits prior to age 59 세 were triggered by one of four distributable events: separation from service with the employer, death, disability, and hardship.

The case is Rhiel v. OhioHealth Corp. (In re Hunter), Bankr. S.D. Ohio, No. 03-68413, 1/24/08.