Protection of plan assets accrued in non ERISA plans

[mbozek]

Now that the Sup Ct has ruled that under ERISA the assets of self employed owners are protected from creditors if the plan also covers common law employees (Yates v. Hendon, Mar 2, 2004) does this protection also include amounts rolled over from a participant's IRA and funds transferred from or accumulated in an HR-10 plan prior to the time the plan becomes subject to ERISA? If the ct decision is read literally only retirement plans without any employees are not protected by the non alienation provisions of ERISA and the source of the funds before they become plan assets is not relevant for protection under the non alienation rule.

[four01kman]

That seems right to me. Once the funds are transferred to the qualified plan that meets the rules (other employees), it appears all amounts would (should) be protected.

Interestingly, I know several states have allowed the "recapture" of transferred IRA money to qualified plans. What I don't know in those cases is whether any other employees were covered by the plan.

[KJohnson]

Mbozek,

I agree with your reading.

As a side note, I remember when I was looking at this a few months back, I found an unpublished 6th Circuit case that leads to the conclusion that a SEP (or SIMPLE) with only owners participating will have more protection that a SEP or SIMPLE that has common law employees participating.

The first part of the reasoning was no surprise. ERISA’s anti-alienation provisions are found in Subtitle B, Part 2 of the statute (Section 206). Pursuant to Section 201, all of Subtitle B, Part 2 does not apply to any arrangement in 408 of the Code. Traditional IRAs, SEPs, and SIMPLEs are all found in 408. Therefore the 6th Circuit ruled that federal antialienation did not apply.

However the part of the decision that I had not previously thought about was that ERISA’s preemption provisions are found in Subtitle B Part 5 (Section 514). The antialienation provisions, in turn, say that they apply to any employee benefit plan described in the coverage provisions of Subtitle A of ERISA (Section 4(a)). Subtitle A covers, as pension plans, IRA arrangements where employer contributions are involved (SEP’s and SIMPLE’s). Therefore the 6th Circuit ruled that ERISA’s preemption provisions do apply and that Michigan law that protected SEP or SIMPLE IRAs was preempted by ERISA. Therfore no state or federal protection.

I think that if you had a SEP or SIMPLE and the only participant was the owner then you would have state law protection because that SEP or SIMPLE would not be covered by ERISA (and therefore ERISA preemption)