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The Bankruptcy Court for the District of Delaware has ruled that 401(k) contributions that Chapter 7 debtors withheld from its employees' paychecks but never sent to the plan administrator are not property of the bankrupt estate and therefore are not subject to the security interests of creditors. The court also held, however, that a trust should be imposed only on the employees' actual contributions and not on the debtors' assets, despite the fact that the funds had been commingled. It is the burden of the Labor Department to show a nexus between the contributions and the funds on which it seeks to impose a trust. Chao v. Lexington Healthcare Group Inc. (In re Lexington Healthcare Group Inc.), No. 03-11007 (December 15, 2005).

The debtors sponsored an ERISA qualified 401(k) plan for their employees. The plan allowed participants to withhold money from their wages to be contributed to the plan on their behalf. The debtors were responsible for withholding the employees' contributions, segregating them from the debtors' general assets, and transferring them to the plan administrator. Unfortunately, both pre- and post-petition there were contributions that were withheld from the employees but never transferred to the plan administrator. Approximately 9 months after the debtors filed their petition, and 6 to 12 months after the contributions had been withheld from the employees, the debtors' accounting manager established an escrow account with the debtors' attorney into which the debtors deposited funds, which were to be used only for payments to employee benefits plans, including the 401(k). Although the secured creditors' liens on the Debtors' assets predated the contributions in question the Secretary of Labor filed a complaint asserting that a trust is imposed on the general assets of the debtors for the benefit of the 401(k) plan pursuant to ' 1103(a) of ERISA, which provides that “all assets of an employee benefit plan shall be held in trust … ”