Question 23: In response to Q&A 20 dealing with the issue of SEP-IRAs (IRAs that qualify as Simplified Employee Pensions) and ERISA creditor protection, a commenter raised the 6th Circuit decision, Lampkins v. Golden, noting “The facts here are bad and so is the decision.” So, should a person roll an IRA into a SEP-IRA, and are these assets protected from creditors?
Answer: When an individual rolls funds from an IRA into an IRA that holds an employer’s contributions under an arrangement described in IRC § 408(k), that IRA (often called a "SEP-IRA") becomes partly funded by the employee rather than by the employer. How should a court treat this situation? We believe a proper analysis is to treat the SEP arrangement as an ERISA employee benefit pension plan but to treat the IRA, at least to the extent of the rolled over IRA funds, as not being part of an ERISA plan and hence to that extent is protected by relevant state laws that to IRAs. (See Alvin J. Golden, "Piercing Shield Laws to Garnish SEP-IRAs," Trust & Estates, Aug. 2002, 51, 52-53. See also Noel Ice, “Treatise on Estate Planning for IRA and QP Distributions,” Section 5.6, available at http://www.trustsandestates.net.)
To our knowledge no court has addressed the specific rollover situation you raise. In the meantime, given the recent cases described below, it is safer for employees with IRAs not to roll them into SEP-IRAs.
An employee pension benefit plan is defined by section 3(2)(A) of ERISA as "any plan, fund, or program ... established or maintained by an employer ... to the extent that by its express terms or as a result of surrounding circumstances such plan, fund or program ... provides retirement income to employees, or ... results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the ... method of distributing benefits under the plan." Section 408(k) of the Internal Revenue Code defines a SEP as an IRA with respect to which certain additional requirements are met, one of which is that the employee's SEP receives employer contributions under a written allocation formula. IRC #&167; 408(k)(1)(A) and (k)(5). Garatt v. Walker, 121 F.3d 565 (10th Cir. 1997), held that a SEP is an employee pension benefit plan as defined in ERISA.
But Section 201(6) of ERISA exempts an IRA defined by IRC § 408 from ERISA Title I, Part 2 coverage. Part 2 of Title I includes section 205(d)(1), the anti-alienation provision that provides protection from creditors. See In re Taft, 171 B.R. 497 (Bankr. E.D.N.Y. 1994). So some courts have held that a SEP, although a pension plan for purposes of ERISA, is exempt from ERISA’s anti-alienation provision. For example, the U.S. District Court for Western District of Virginia recently held a doctor’s SEP was subject to forfeiture because ERISA’s anti-alienation provisions do not apply to IRAs, including SEPs. U.S. v. Norton, 2002 WL 31039138, No. 2:99CV10078 (W.D.Va. 2002).
In Lampkins v. Golden, the 6th Circuit held that a SEP is governed by ERISA and hence federal preemption eliminates the protection from creditors that otherwise would be provided by a state exemption statute. (2002 U.S. App. LEXIS 900 (6th Cir. 2002).) The appellate court held that although an IRA that is part of a SEP arrangement is not subject to ERISA’s anti-alienation provision, it is subject to ERISA’s preemption provision (ERISA § 514). The 6th Circuit held a relevant Michigan statute, non-garnishment of SEP assets, was preempted by ERISA because it “related to” an ERISA plan.
The 11th Circuit nearly a decade ago also held that ERISA creditor protection does not extend to a SEP-IRA. (In re Schlein, 8 F.3d 745 (11th Cir. 1993).) The court held the SEP-IRA was an employee benefit plan as defined by ERISA and hence the Florida statute that might have protected it was preempted by ERISA § 514, because the Florida statute directly “related to” an employee benefit plan. However, the court held ERISA’s savings clause (section 514(d)) “saved” the Florida statute from preemption. The Bankruptcy Code includes a provision that allows states to define exemptions under 11 U.S.C. § 522(b)(1). The 11th Circuit reasoned Congress did not intend ERISA preemption to encompass all other areas of federal legislation, especially when the Florida bankruptcy exemption statute was “federalized” to take the place of the federal bankruptcy exemption statute. Florida has opted out of the scheme of federal bankruptcy exemptions and has chosen to enact its own bankruptcy exemptions.