Congress Sends Bankruptcy Bill to White House

April 15, 2005 ( - The Bankruptcy Abuse Prevention and Consumer Protection Act - which includes numerous retirement provisions - has passed both chambers of Congress and is on its way to the White House.

>On Thursday, the House passed the bill, which has been long-sought by credit card companies and banks, as well as politicians. President Bush is expected to sign the bill.

Retirement Provisions

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>The bill includes numerous provisions related to pension assets, and, overall, excludes more retirement income from a pension plan participant’s bankruptcy estate. Under Section 224, the new bill will add retirement plans held in tax-exempt plans under Sections 403, 401, 408, 408A, 414, 457 and 501(a) to Section 401 plans as retirement assets excluded from bankruptcy proceedings.

>Plans under the Employee Retirement Income Security Act (ERISA) – which includes 401(k) plans – were already excluded.

>All in all, the bill spells greater protection for retirement savings for an individual filing for bankruptcy. Before, only ERISA plans were protected; now, some plans not subject to ERISA – such as governmental and church plans, 401(b) annuities and individual retirement accounts (IRA) – are also protected.

>The bill does cap any IRA exclusion to $1 million, not including rollovers from qualified plans, however. Ths US Supreme Court recently ruled that IRA assets can be protected under bankruptcy laws (See  US Supreme Court Extends Bankruptcy Protection to IRAs ).

>The bankruptcy bill also exempts plan loan repayments via payroll deductions and the automatic stay provisions. It also amends certain Sections so that debtors can not discharge their loans owed to pension, profit-sharing, stock bonus or other retirement savings plans. It will also exclude plan contributions withheld from employees’ wages.

Executive Compensation Changes

The bill also alters certain Sections pertaining to executive compensation in bankruptcy. One change made is to limit retention bonuses paid by an employer in bankruptcy. With the new bill, only bonuses that are essential to employee retention (when the employee has other offers to work elsewhere). It would also limit such bonuses to 10 times the amount paid to nonmanagement employees. Severance benefits are also capped by the bill.