ERISA protection

[SMB]

Client (incorporated dentist) is winding down his practice and will likely shut down entirely and "unincorporate" in the next year or so. Currently sponsors a PS Plan and would like to maintain the ERISA protection of the plan assets for as long as possible.

Once the "sponsoring employer" ceases to exist, wouldn't the plan have to be terminated and assets distributed? If so, he'd do a rollover to an IRA, which has protection in the event of "bankruptcy" - but not the extent of protection against "creditor's claims" as his qualified plan - IF I understand the current state of such things(?).

Any other possibilities for continuing to maintain the plan - and/or continue ERISA asset protection?

Thanks to all who take the time to respond!

[Guest FLMaster]

Keep the plan but do not make any profit sharing contributions-It is difficult to say "I would like to have the protection of a plan but not have one"-It's like saying I would like to have the protection of a corporation but do not want to incorporate.

[JanetM]

Two options that I see.

He will need to be generating some Schedule C income and sponsoring plan as sole proprieter

or

Earn some kind of W-2 income from some other plan sponsor and roll the funds to that plan.

[JAY21]

Just what are his layers of protection if he keeps the plan ? Assume his state has statutes that protect qualified plans (I assume most do). Is it the following (in no particular order):

1. Protection under Federal Bankruptcy Code (passed in last couple of years ??).

2. Protection under State Bankruptcy Code (if state has such statute).

3. Does U.S. Supreme Court Case (1992; Shummate vs. Patterson) help here if no rank-and-file employees (believe the "Erisa Qualified Plan" language in the case has been interpreted to mean only ERISA plans are covered).

How does the federal bankruptcy code recently passed help, if at all, if a creditor attacks you in state court. Does it pre-empt the state bankruptcy code in this situation ?

I guess I'm trying to get a feel for the practical logistics of how these al interact vs. just the blanket statement that they're protected.

[Guest mjb]

Your client needs to check state law to see if IRAs are protected against creditors claims. Many states (NY, NJ) do not allow the seizure of IRA assets by creditors outside of bankruptcy. Under the bankruptcy reform act, all qualified plans are now protected from creditors in bankruptcy regardless of whether there are any employees. There are no state bankruptcy laws. While the dentist may have to dissolve his Corp if it was a PC, I dont see why the dentist has to terminate his q plan as long as he continues the plan under some business activity maintained by a sucessor employer, even as a self employed person. He could establish a 401k plan to contribute 100% of any earnings from self employment up to 15k.

[GBurns]

If he establishes a 401k plan to contribute 100% of any earnings from self employment up to 15k, but because he is retired he ends up having no income from SE, How long can he continue to do this? What are the restrictions on the length of time that he can have $0?

That is what I see as his potential problem, so I wonder what happens in that case.

[SMB]

Client is in Arizona, if anyone is familiar with that state's laws in this regard.

Client owns a number of rental properties, the income from which is what he intends to live on after he winds down his dental practice. I assume that such income would constitute "investment income" versus "compensation" and could not be used for qualified plan contribution purposes?

Could he possibly operate his rental units as a business and pay himself a "management fee" or something to that effect that would/might constitute compensation for QP purposes?

Way out of my league here, so appreciate all of your comments.

[Guest mjb]

Client needs to consult his accountant to determine how he can receive a management fee that is 1099 self imployment income which will allow contributions to the 401k plan. (One option is to incorporate the rental property business to receive the income and pay himself a salary for his services as an employee. The corp will be the plan sponsor.) The IRS ony requires that contributions to PS/401k plans be substantial and recurring but there is no specificity as to how often they must be made or the amount of the contribution.

[Guest FLMaster]

The income may not be income from an "active trade or business" and you did not qualify under 162 of the code. The test is a 'facts and circumstances test" which will send actuaries crazy-subjective. If you fail the test.....move to Fla. Excuse me Cayman islands. or my favorite set up"The costa-rica trust!"