How much bankruptcy protection for one-person plan?

[Lynn Campbell]

Since a plan in which only the owner participates is not covered by ERISA, how much bankruptcy protection does this particpant have? Is the protection the same in an IRA, or should the person keep it in the retirement plan? Thanks for all input.

[David MacLennan]

My feeling is that a qualified plan has more protection than an IRA, even if it is not an ERISA plan. If the plan assets were threatened, it would seem one could hire a part-time employee, lower eligibility, and presto you have an ERISA plan. IRA protection varies from state to state. The bankruptcy reform bill pending in Congress, if passed, may give equal protection to ERISA, non-ERISA, IRA's, and other retirement plans (see the recent ASPA Journal article - however, it's not clear to me if individual states would have to elect the federal bankruptcy exemptions to get the new IRA protection in the pending legislation).

[Mary Kay Foss]

This is a state law question. I understand that in California a single owner or owner-spouse Keogh plan has the same bankruptcy protection as an IRA. Apparently there was a case in the last few years where a couple hired their daughter and because she was in the plan they got the full ERISA protection.

Many states give protection similar to ERISA protection to all IRAs including Roth IRAs. The proposed federal legislative solution is the answer so that the treatment is equal across the nation.

[Kirk Maldonado]

My recollection is that the protection given to IRA owners and self-employed individuals under California law is limited, not absolute.

[mbozek]

ERISA protection from creditors does not automatically extend to self employed persons or S Corp owners merely because there are common law employees in the plan sponsor. In some states the employer is considered to be the alter ego of the the owner and thus there is no separate entity for the bankruptcy protection. The theory is that an individual cannot put his own assets into a trust to avoid the claims of creditors.

By the way there will be no federal protection for IRAs since the bankruptcy legislation has been defeated in the Senate.