Bankruptcy... pension account protected?

[K-t-F]

Are monies in a 401(k) plan subject to creditor attachment or does the "anti-assignment rule" of section 401(a)(13) protect one's assets from creditor attachment.

[mbozek]

If the plan is subject to ERISA (e.g, has at least one Common law employee other than a spouse) then the assets are exempt from the participant's creditors. In non ERISA plans state law (e.g., NY NJ) can protect the assets. Vested Plan assets are generally exempt from employer's creditors.

[Guest JVH]

I had occasion in the past few weeks to address this issue, so I'll add a few citations for you. In the landmark case of Patterson v. Shumate, 504 U.S. 753 (1992), the United States Supreme Court made it clear that ERISA’s anti-alienation provision constitutes other “applicable non-bankruptcy law” such that a debtor’s bankruptcy estate "excludes", as a matter of federal bankruptcy law, any interest in an ERISA-qualified plan. Owner only plans are not subject to ERISA, so the plan needs to cover participants other than the owner and spouse in order to get this protection. Subsequent to Patterson v. Shumate, bankruptcy trustees argued that the ERISA exclusion is available only if the retirement plan is both subject to ERISA and is tax qualified under Code §401(a), et. seq. These arguments have been rejected by the Appellate Courts. See In the Matter of Baker, 114 F.3d 636 (7th cir 1997) and In re Sewell, 180 F.3d 707 (5th cir 1999). As a result of these two appellate cases, it is reasonably accepted that the status of the ERISA qualified retirement plan in question as a qualified plan under Code §401(a) et. seq. is irrelevant. If you are dealing with an owner only case, then you must look at the state law bankruptcy "exemptions." Florida for example has its own set of exemptions and exempts interests in plans and arrangements under Code section 401(a), 403, 408 and 409. In those instances, the bankruptcy trustee can and will attempt to prove the plan or arrangement is not qualified because of document or operational failures.

[mal]

There was an AP article in the paper this morning about bankruptcy protection of IRA benefits. I believe the Supreme Court heard arguments yesterday on this issue. The facts involved a person who had $50k in a 401k plan which was protected under the Code. However, after she left her job, she rolled it into an IRA which may not have the same protection. Creditors tried to attach and the mess ended up in Washington.

[Ron Snyder]

The question did not involve bankruptcy. Retirement plan assets are exempt from claims of creditors, although such exemption does not apply to any amounts loaned by the plan to the participant.

Since that Patterson v Shumate decision, several states have ruled on the application of state bankruptcy statutes to ERISA benefits. In general, the test is whether under the state bankruptcy statute ERISA plans are "spendthrift trusts". Some states (like Texas) make IRAs exempt from bankruptcy, but not qualified plan monies, while other states (like California) exempt qualified plan monies but not IRAs. Some exempt both.

It is possible to file bankruptcy in either federal or state court, and for a different result on this issue based on choice of forum. A client would be wise to retain a law firm with expertise both in bankruptcy as well as in ERISA under such circumstances.

[mbozek]

I dont understand why a person would file under a state bankruptcy law (if such a law exists) because only fed bankruptcy law provides for a complete discharge of all debts. A person who files under fed bkcy law can elect to chose the greater of the protection of assets under state law or bankruptcy law., e.g, Tx and Fla provide for homestead exemptions which prevent the seizure of the residence of the debtor which is not available under bkcy law.