If you have been following The Castleton Group 401(k) MEP situation, today brings an update on Suzanne Clifton, the owner and President of The Castleton Group.
If you are not aware of The Castleton Group 401(k) MEP situation, you should still find this case interesting because it addresses what happens when a participant rolls a 401(k) account balance into an IRA while their bankruptcy estate is open.
In 2005, Congress revised the Bankruptcy exemption for individual retirement accounts (IRAs) with the Bankruptcy Abuse Prevention, Consumer Protection Act of 2005. It changed the exemption for contributory IRAs to allow a petitioner to exempt up to $1 million in a contributory IRA without requiring the bankruptcy trustee to consider the needs of the participant. Congress made this change in response to the U.S. Supreme Court’s decision in Rousey v. Jacoway, 544 U.S. 320, on April 4, 2005, which found that IRAs could be excluded from a bankruptcy estate to the extent reasonably necessary for support. Individual States are also permitted to exempt IRA account balances, and to date 37 States have done so. North Carolina is one of those States.
Fast forward to 2012, where the U.S. Bankruptcy Court for the Eastern District of North Carolina, Raleigh Division in In re Clifton, No. 09-02379-9-RDD, (March 26, 2012) is asked to decide whether a former participant in a 401(k) plan who rolls their account balance over into an IRA while the bankruptcy is pending can exclude the amount in the IRA from their bankruptcy estate. (hat tip to Leagle.com for a copy of the opinion.)
The petitioner, Suzanne Clifton, was one of the owners of The Castleton Group and a participant in The Castleton Group 401(k) Plan. The Castleton Group was a professional employer organization (PEO) specializing in human resources outsourcing with more than 1,000 participants in their 401(k) multiple employer plan (MEP). Transamerica served as both recordkeeper and TPA for the MEP.
It is not known whether The Castleton Group 401(k) Plan was originally set up as a MEP when it was established on Jan. 1, 1998, or if it became a MEP in response to IRS Notice 2002-21, which required PEOs to either terminated their defined contribution plans or convert them to a MEP.
In late 2007, The Castleton Group ceased operations and the IRS froze the 401(k) plan in early 2008.
On March 24, 2009, Suzanne Clifton filed for relief under Chapter 11 of the Bankruptcy Code, which was converted to a Chapter 7 filing on Sept. 14, 2011.
On Jan. 12, 2011, the DOL obtained a consent judgment from The Castleton Group and permanently barred Suzanne Clifton from serving as a fiduciary of any employee benefit plan governed by ERISA in the future.
In November of 2011, the 401(k) plan was unfrozen, and Transamerica contacted participants about what they wanted to do with the funds in their 401(k) accounts. Ms. Clifton chose to roll her 401(k) account balance over to a Northwestern IRA, and subsequently withdrew part of her account balance from the IRA.
The bankruptcy trustee challenged the exclusion of the IRA account balance from the assets of Ms. Clifton’s bankruptcy estate since the funds were in an IRA and not part of the 401(k) plan which the Court had allowed as exempt on Feb. 15, 2012. The Court found that since there was no evidence that the funds in Ms. Clifton’s IRA had not come from the 401(k) plan, the motion of the trustee to find the funds not exempt was denied.