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Challenging 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 challenges in greater depth below.

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 Bona Fide 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" include, not by way of limitation:

(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.

By contrast, indicia of a bogus "plan" include, not by way of limitation:

(1) Stuffing title to the participant's personal residence (and vacation homes, etc.) into the plan;
(2) Stuffing personal assets of the participant, such as cars, jewelry, collectibles, into the plan;
(3) Direct contributions from the participant into the plan, other than a bona fide rollover from another plan;
(4) Participant has access, direct or indirect, to the plan assets prior to retirement;
(5) Participant has repeatedly borrowed from the plan and/or the loans to the participant are unsecured;
(6) Participant has treated the plan as her personal piggy bank, e.g., using the plan to make the participant's credit card payments, etc.; and
(7) The plan is neither a defined contribution nor a defined benefit plan;
(8) Plan contributions or benefits have not been actuarially determined;
(9) The plan has not generally been treated as a bona fide retirement plan.

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).




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