State Seizure of Plan Assets

[Randy Watson]

Sole proprietor has a tax qualified plan. The State has seized all assets, including the assets of the one-man retirement plan. We don't have the protections of ERISA's anti-alientation rules...would 401(a)(13) protect the benefits from State seizure of assets?

[jpod]

It isn't 401(a)(13) that could protect the assets. A tax-qualification requirement for securing favorable tax treatment has no substantive effect on the application of other laws.

However, if the money is in an irrevocable trust as required by 401(a), that money should be protected as long as it is held in trust; not because of 401(a), but because of the likely terms of the trust. On the other hand, depending upon what this fellow did to have all his assets seized, the State may be able to force him to terminate the plan and as settlor of the trust cause a distribution of his plan assets, and THEN seize those assets.

[Guest Sieve]

Also, some states have a "merger" doctrine by which a trust, established by one person, for the beenfit of that one person, and trusteed by that same person, is considered NOT to be a trust. That may be partly what's at work here.

[jpod]

I agree with Sieve 100%, but I didn't mention it because there is ancient IRS authority (still good, I think), suggesting that you don't have a good 401(a) trust if the "merger" doctrine would apply.

Query what happens if it is merely a custodial account with a bank or other non-bank custodian and not a trust, as is permitted for a one-person, non-ERISA plan, that recites all the magic 401(a)(2) language and contains non-assignment language? Is it automatically at risk because it is not a "trust"?

[Guest Sieve]

Probably. But, I honestly don't know.

[Ron Snyder]

You are ignoring the central question: are such state laws pre-empted by ERISA. The general answer is yes. One exception is in the case of bankruptcy. The Federal bankruptcy statute was passed after ERISA and did not defer to ERISA. Therefore, whether or not such benefits are protected in bankruptcy depends on whether, under state law, the trust is a spendthrift trust.

Another exception to the general rule may be in other laws passed after ERISA, such as the Patriot Act and forfeiture laws related to narcotics violations. However, these would also have to be federal, not state. There is almost nothing a state can do to seize assets legally from an ERISA-qualified retirement trust. Note: we have discussed escheat statutes previously.