Plan Defect Issues Of California Private Retirement Plans
California Private Retirement Plans can be challenged directly if any of three facts can be proven by a creditor:
(1) The Plan did not have a primary retirement purpose.
(2) There was no bona fide "retirement plan" to begin with;
(3) The Plan was substantially not followed; or
We'll examine each of these in greater depth below.
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Plan Not Primarily For Retirement
The primary purpose of the Plan must be to fund the employee's retirement; if the Plan primarily exists for some other reason, then the creditor protections of § 704.115(a)(1) are not available.
Example: Tim creates a retirement plan primarily for asset protection purposes. Since the purpose of the plan is not primarily for retirement, the plan is not protected from creditors under § 704.115(a)(1). O'Brien v AMBS Diagnostics, LLC, 38 Cal.App.5th 553, 251 Cal.Rptr.3d 41 (Aug. 8, 2019).
Note that merely reciting that the Plan is primarily for the employee's retirement purposes is not enough, as the court may (and should) look at all the surrounding circumstances to objectively determine what the primary purpose of the Plan really is. In the absence of direct evidence of the purpose of the Plan, as in O'Brien, the court may examine such circumstances that are quite similar to those examined in a voidable transactions case, i.e., whether the Plan was created at a time when the debtor had potential creditor concerns, whether the Plan was reasonably funded for a realistic retirement goal or instead acted as the employee's creditor-exempt piggy bank, etc. Speaking of piggies, this is where the common-sense maxim applies to private retirement plans: Pigs get fat, hogs get slaughtered.
No Real Plan
To have a "private retirement plan", you quite fundamentally need a "plan". No plan, no private retirement plan.
A "plan" is greater than just having some intention to hold money for retirement. Example: Mary has a mutual fund that holds $100,000 that Mary has designated as being for her retirement. This is not a "plan".
The hallmarks of a real "plan" are:
(1) There is an employee/employer relationship;
(2) There is an agreement between an employee and an employer that certain of the employee's rights to pay will be contributed into a plan;
(3) There is a designated Plan Administrator;
(4) The plan assets will be held in trust and administered by the Plan Administrator for the benefit of the employee;
(5) The plan includes a schedule and/or formula for contributions into the plan;
(6) The plan includes a schedule and/or formula for payments to the employee upon the employee's retirement; and
(7) Prior to retirement, the employee has no access to the plan assets.
Example: John sets up a 401(k) plan through his business. The 401(k) plan meets all seven of the criteria set forth above. Assuming John substantially follows the Plan (see below), the 401(k) plan will qualify as a private retirement plan under CCP § 704.115(a)(1). See Schwartzman v. Wilshinsky, 50 Cal.App.4th 619, 57 Cal.Rptr.2d 790 (1996).
Example: Jane has an incentive stock profit-sharing plan provided by her employer, which she uses to supplement her income with the balance held for retirement purposes. She routinely takes money from the plan to fund various personal projects. The plan is not exempt under CCP § 704.115(a)(1). See In re Segovia, 404 B.R. 896 (2009).
Example: Donnie owns an annuity that he intends to use as his retirement vehicle. The annuity is not a "plan" under CCP § 704.115 and thus is not exempt. See In re Chen, 2011 WL 2358653 (Bk.N.D.Cal., 2011).
Example: Jim sells is home and uses the money to set up a living trust for his benefit which is funded by an annuity. The arrangement is not a "plan" under CCP § 704.115 and thus is not exempt. See In re Barnes, 275 B.R. 889 (Bk.E.D.Cal., 2002).
Example: Fred sells his business and gets quarterly payments through a covenant not to compete, which payments he intends to use for his retirement. This is not a "plan" for purposes of CCP § 704.115 and the payments are not exempt. See In re Lieberman, 245 F.3d 1090 (9th Cir., 2001).
Plan Not Followed
Merely having a plan that meets all the criteria of a private retirement plan is not good enough. Even the best-designed and most immaculate and detailed plan can be defeated by creditors if it is not closely followed. Very simply, the plan must be substantially followed by all of the employer, employee, and Plan Administrator. If the plan is not followed or is abused to the detriment of creditors, then a serious risk arises of the exemption under CCP § 704.115(a)(1) being lost.
Common ways to blow the CCP § 704.115(a)(1) exemption include, not by way of limitation:
(1) Making contributions to the plan in excess of its needs;
(2) Taking assets from the plan prior to retirement;
(3) Taking excessive loans from the plan;
(4) Using plan assets for something other than retirement purposes;
(5) Allowing the employee too much control (direct or indirect) over plan assets; and
(6) Treating the plan as the employee's personal piggy-bank.
Most private retirement plans lose their exemption not because of their design, but because they were not substantially followed.
Example: Sam takes a sizeable, unsecured personal loan from his private retirement plan, and then has his employer contribute additional moneys to the plan to keep those moneys from the employer's own creditors. The plan has been misused as something other than a private retirement plan, and the exemption is lost. See In re Daniel, 771 F.2d 1352 (9th Cir., 1985).
ARTICLES ON CALIFORNIA PRIVATE RETIREMENT PLANS
2020.01.20 ... California Retirement Plan For Asset Protection Purpose Fails To Qualify For Creditor Exemption In O’Brien
2019.12.28 ... The California Private Retirement Plan: Separating Fact From Fiction
TEXT OF CCP § 704.115
California Code of Civil Procedure § 704.115.
(a) As used in this section, “private retirement plan” means:
(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986, as amended, including individual retirement accounts qualified under Section 408 or 408A of that code, to the extent the amounts held in the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code.
(b) All amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan are exempt.
(c) Notwithstanding subdivision (b), where an amount described in subdivision (b) becomes payable to a person and is sought to be applied to the satisfaction of a judgment for child, family, or spousal support against that person:
(1) Except as provided in paragraph (2), the amount is exempt only to the extent that the court determines under subdivision (c) of Section 703.070.
(2) If the amount sought to be applied to the satisfaction of the judgment is payable periodically, the amount payable is subject to an earnings assignment order for support as defined in Section 706.011 or any other applicable enforcement procedure, but the amount to be withheld pursuant to the assignment order or other procedure shall not exceed the amount permitted to be withheld on an earnings withholding order for support under Section 706.052.
(d) After payment, the amounts described in subdivision (b) and all contributions and interest thereon returned to any member of a private retirement plan are exempt.
(e) Notwithstanding subdivisions (b) and (d), except as provided in subdivision (f), the amounts described in paragraph (3) of subdivision (a) are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires. In determining the amount to be exempt under this subdivision, the court shall allow the judgment debtor such additional amount as is necessary to pay any federal and state income taxes payable as a result of the applying of an amount described in paragraph (3) of subdivision (a) to the satisfaction of the money judgment.
(f) Where the amounts described in paragraph (3) of subdivision (a) are payable periodically, the amount of the periodic payment that may be applied to the satisfaction of a money judgment is the amount that may be withheld from a like amount of earnings under Chapter 5 (commencing with Section 706.010) (Wage Garnishment Law). To the extent a lump-sum distribution from an individual retirement account is treated differently from a periodic distribution under this subdivision, any lump-sum distribution from an account qualified under Section 408A of the Internal Revenue Code shall be treated the same as a lump-sum distribution from an account qualified under Section 408 of the Internal Revenue Code for purposes of determining whether any of that payment may be applied to the satisfaction of a money judgment.
Published Court Opinions regarding California private retirement plans (sorted by date):
In re Daniel, 771 F.2d 1352 (9th Cir., 1985).
In re Bloom, 839 F.2d 1376 (9th Cir., 1988).
In re Crosby, 162 B.R. 276 (Bk.C.D.Cal., 1993).
Yaesu Electronics Corp. v. Tamura, 28 Cal.App.4th 8, 33 Cal.Rptr.2d 283 (1994).
Schwartzman v. Wilshinsky, 50 Cal.App.4th 619, 57 Cal.Rptr.2d 790 (1996).
In re Friedman, 220 B.R. 670 (9th Cir.B.A.P., 1998).
In re Phillips, 206 B.R. 196 (Bk.N.D.Cal., 1997).
In re Lieberman, 245 F.3d 1090 (9th Cir., 2001).
In re Barnes, 275 B.R. 889 (Bk.E.D.Cal., 2002).
In re Stern, 345 F.3d 1036 (9th Cir., 2003).
McMullen v. Haycock, 147 Cal.App.4th 753, 54 Cal.Rptr. 3d 660 (2007).
In re Rucker, 570 F.3d 1155 (9th Cir., 2009).
In re Segovia, 404 B.R. 896 (2009).
In re Simpson, 557 F.3d 1010 (2009).
In re Beverly, 374 B.R. 221 (9th Cir., B.A.P., 2011).
In re Chen, 2011 WL 2358653 (Bk.N.D.Cal., 2011).
Marriage of La Moure, 221 Cal.App.4th 1463, 15 Cal.Rptr.3d 417 (2013).
Salameh v. Tarsadia Hotel, 2015 WL 6028927 (S.D.Cal., 2015).
O'Brien v AMBS Diagnostics, LLC, 38 Cal.App.5th 553, 251 Cal.Rptr.3d 41 (Aug. 8, 2019).
Only published court opinions are included; non-published opinions are not useful as legal precedent and should not be relied upon for any purpose.
MAIN SECTIONS OF THIS WEBSITE
Leading Court Opinions and Legislative History of CCP § 704.115 -- The published court opinions, both state and federal, and the legislative history of CCP § 704.115 give valuable insight into how California private retirement plans should be properly structured and used. See Court Opinions and Legislative History page.
Voidable Transactions Issues (formerly: Fraudulent Transfers) -- As amply demonstrated by the case law, the law of voidable transactions (formerly: fraudulent transfers) has frequently and successfully been used by creditors to avoid transfers made to California Private Retirement Plans. Please see our Voidable Transactions page for more.
Plan Defect Issues -- Creditors have frequently been successful in busting California Private Retirement Plans because either (1) there was no real "plan", or (2) the plan was not substantially followed by the debtor. Read more on our Plan Defect Issues page.
ERISA, Tax-Qualified Plans and Non-Tax Qualified Plans -- Considers the types of private retirement plans as measured by ERISA and tax law, including ERISA-qualified plans, tax-qualified plans, and non-qualified plans. Read more on our ERISA and Tax Issues page.
Post-Distribution Exemption-Tracing Issues -- Considers the application of the exemption tracing statute, CCP § 703.080, to California Private Retirement Plans. Please visit our Post-Distribution Exemption-Tracing Issues page.
Services & Contact Information -- Jay Adkisson assists clients in creating California Private Retirement Plans in appropriate circumstances, and reviews existing plans for their defensibility against creditor challenges. Jay is also involved with litigation in attacking PRPs from the creditor's side, and defending them from the debtor's side. Please see our Services & Contact Information page.
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© 2020 by Jay D. Adkisson. All Rights Reserved. No claim to original government works. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction. Questions about this website should be directed to jay [at] jayad.com or by phone to 702-953-9617 or by fax to 877-698-0678. This website is https://privateretirementplans.com