An Inherited 401(k) Retirement Account is Excluded from the Bankruptcy Estate

By: Aron Kaplan

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

 

            The Bankruptcy Court for the Western District of North Carolina, in In re Dockins, held that the funds from a 401(k) retirement account that was inherited by a debtor before she filed for bankruptcy was not property of the bankruptcy estate.[1] Debtor Holly R. Corbell-Dockins (“Dockins”) and her husband filed voluntary petitions for relief under Chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”) on April 2, 2020.[2] In March 2020, Dockins inherited a 401(k) account owned by her deceased former partner (“Decedent”).[3] During her bankruptcy case, her attorney disclosed to the  Chapter 7 Trustee (“Trustee”) that she had inherited a 401(k) account.[4] Later, Dockins’s attorney updated the Trustee that Decedent’s employer had set up a 401(k) in Dockins’s name, consisting of the inherited funds.[5] Dockins’s attorney asserted that the account was not estate property.[6] The Trustee believed that the 401(k) was estate property, and filed a Motion for Turnover on November 23, 2020.[7]

         The Trustee argued that since § 541(b) of the Bankruptcy Code does not list a 401(k) as property excluded from a bankruptcy, and there is no statutory exemption for the account, the funds should be turned over to the Trustee.[8] However, Dockins argued that the applicable federal rule is not § 541(b), but § 541(c)(2), which states that “[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.”[9] Because the Supreme Court held that the transfer restriction on ERISA-qualified plans constitute “applicable nonbankruptcy law,” and that an inherited 401(k) has an anti-alienation provision, Dockins argued that her account is excluded from the estate, so long as the transfer restriction existed on the petition date.[10]

         The court first noted that the transfer restriction under nonbankruptcy law is the essential element of § 541(c)(2), that all 401(k)s have such transfer restrictions, and “transfer by inheritance does not remove the restriction.”[11] Second, the court explained that Supreme Court precedent is consistent with protecting pension benefits in ERISA-qualified plans, such as 401(k)s, from bankruptcy by enforcing the anti-alienation provisions of the plans.[12] Finally, the court detailed how the unique characteristics of an inherited 401(k) does not change the analysis.[13] Ultimately, the court concluded that the essential consideration that must be satisfied for an inherited 401(k) to be protected from bankruptcy is that the funds must be in the “hands of the plan administrator” and the beneficiary cannot withdraw any funds prior to filing Chapter 7.[14] Here, the court held that because the plan administrator retained control of the 401(k) account at the time Dockins--the beneficiary of the account--filed for bankruptcy, “the 401(k) funds were not property of the [bankruptcy] estate under § 541(c)(2).”[15]

         In conclusion, the status of an inherited 401(k) account is determined by whether the account was under the control of the debtor when the debtor filed for bankruptcy.[16] Accounts that were under the control of the plan administrator as of the filing date do not become part of the bankruptcy estate.[17]

 

 

 




[1] In re Dockins, No. 20-10119, 2021 Bankr. LEXIS 1516, at *1, *1 (Bankr. W.D.N.C. June 4, 2021) (holding additionally that the debtor “[did] not need an exemption to keep it.”).

[2] Id.

[3] Id. at *2.

[4] Id.

[5] Id. at *3–*4.

[6] Id. at *4.

[7] Id.

[8] Id. at *5–*8.

[9] Id. at *8.

[10] Id. at *9.

[11] Id. at *11–*12.

[12] Id. at *12–*13.

[13] Id. at *13–*14.

[14] Id. at *15.

[15] Id.

[16] Id.

[17] Id. (noting, however, that any funds that the debtor had withdrawn from the account prior to filing does become estate property).