Is a non-electing DB church plan protected from creditors

[katieinny]

We don't do much with either DBs or church plans, so I'm really out of my element here. I don't believe that participants under a non-electing DB church plan would be protected from creditors because they aren't under ERISA. But just because it seems logical to me doesn't make it so. I also found an earlier link that said a church plan isn't covered by the PBGC either. Is that true whether or not they chose to be an ERISA plan, or would an ERISA church plan be required to pay PBGC premiums? Your help is appreciated.

[david rigby]

ERISA section 4021(b):

(b) Plans not covered

This section does not apply to any plan—

(1) which is an individual account plan, as defined in paragraph (34) of section 1002 of this title,

(2) established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing, or to which the Railroad Retirement Act of 1935 or 1937 [45 U.S.C. 231 et seq.] applies and which is financed by contributions required under that Act, or which is described in the last sentence of section 1002 (32) of this title [2]

(3) which is a church plan as defined in section 414 (e) of title 26, unless that plan has made an election under section 410 (d) of title 26, and has notified the corporation in accordance with procedures prescribed by the corporation, that it wishes to have the provisions of this part apply to it;

[katieinny]

Thank you, David. I have been reading articles about the 2005 Bankruptcy Act that seem to say that plan assets are protected from creditors even if the plan is not covered by ERISA. So now I'm more confused than I was before. What am I missing here?

[Peter Gulia]

Even if a debtor's retirement plan benefit is not excluded (as not property of his or her bankruptcy estate), a benefit can be exempt if it is "[r]etirement funds [sic] to the extent that those funds [sic] are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986." 11 U.S.C. 522(d)(12) [attached].

USCODE_2009_title11_chap5_subchapII_sec522.pdf

[katieinny]

Peter: After reading half the afternoon away, I finally got to the same place you sent me. Wish I had waited for your answer and saved myself a lot of time! But confirmation is nice, too, so thank you very much.

I'm right about the PBGC coverage aren't I -- only applies if they are an ERISA plan?

[david rigby]

I'm right about the PBGC coverage aren't I -- only applies if they are an ERISA plan?

Yes, I think so. However, notice the "and" in clause (b)(3). A strict reading is that a church plan can elect ERISA coverage, but not elect PBGC coverage. You might search PBGC regs to see if they have any more on that point.

[mbozek]

We don't do much with either DBs or church plans, so I'm really out of my element here. I don't believe that participants under a non-electing DB church plan would be protected from creditors because they aren't under ERISA. But just because it seems logical to me doesn't make it so. I also found an earlier link that said a church plan isn't covered by the PBGC either. Is that true whether or not they chose to be an ERISA plan, or would an ERISA church plan be required to pay PBGC premiums? Your help is appreciated.

There are two separate classes of creditors. If the church plan is qualified under IRC 401(a) then the benefits of participants cannot be seized by a bankruptcy creditor.

If the participant is sued by a judgment creditor on a non bankruptcy claim the retirement benefits will be protected from such a creditor if state law does not permit seizure of pension benefits by a creditor or if the plan contains a spendthrift provision not allowing seizure of a participant's benefits by a creditor.