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Protect retirement assets: new bankruptcy legislation adds protections for retirement plans.

Debtors have hit a fork in the road A Fork in the Road is an Australian travel television series airing on SBS and hosted by Pria Viswalingam.

Described by SBS as "the thinking-person’s travel show" the program takes the viewer off the beaten track and takes a look at the lives of the people
. The Bankruptcy Abuse Prevention and Consumer Protection Act The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Pub.L. 109-8, 119 Stat. 23, enacted 2005-04-20), provided for significant changes in Bankruptcy in the United States, was passed by the 109th United States Congress on April 14, 2005 and signed into law  of 2005 (effective October 17, 2005) clarifies the rights of debtors and expands the protections their retirement assets have in federal bankruptcy proceedings bankruptcy proceedings n. the bankruptcy procedure is: a) filing a petition (voluntary or involuntary) to declare a debtor person or business bankrupt, or, under Chapter 11 or 13, to allow reorganization or refinancing under a plan to meet the debts of the party . But outside of federal bankruptcy things remain murky, and there still is uncertainty about whether retirement funds are subject to state attachment and garnishment garnishment, in law, means of requiring a third party who holds a debt (including wages) due a defendant to retain the property temporarily. The garnishment consists of a warning, in the form of a judgment, to the third party, called the garnishee, not to deliver the  proceedings. This article gives CPAs guidance on what has changed and tips for protecting clients' assets under either scenario.


The new law protects retirement funds by excluding them from federal bankruptcy estates. It applies to any fund or account that is tax-exempt under

* IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel.  section 401(a)--tax-qualified retirement plans (pensions, profit-sharing and IRC section 401(k) plans).

* IRC section 403(b)--tax-sheltered annuity plans generally available to individuals working for IRC section 501(c)(3) employers.

* IRC section 457(b)--deferred compensation plans for employees of-tax-exempt and state and local government employers.

The extent of the bankruptcy exclusion for an IRC section 408 IRA Ira, in the Bible
Ira (ī`rə), in the Bible.

1 Chief officer of David.


3 Two of David's guard.
IRA, abbreviation
 varies. IRAs created under an employer-sponsored IRC section 408 SEP 1. SEP - Someone Else's Problem.
2. (tool) SEP - A SASD tool from IDE.
 IRAs and SIMPLE IRAs Simple IRA

A salary deduction plan for retirement benefits provided by some small companies with no more than 100 employees.
, as well as pension, profit-sharing or 401(k) funds transferred to a rollover IRA Rollover IRA

A traditional individual retirement account holding money from a qualified plan or 403(b) plan. These assets, as long as they are not mixed with other contributions, can later be rolled over to another qualified plan or 403(b) plan. Also known as a conduit IRA.
, enjoy an unlimited exclusion from the federal bankruptcy estate. The U.S. Bankruptcy Code Bankruptcy Code may refer to:
  • Bankruptcy in Canada
  • Bankruptcy in the United States
  • Bankruptcy in China
 now also excludes traditional IRAs Traditional IRA

An IRA that is not a Roth IRA or a SIMPLE IRA. Individual taxpayers are allowed to contribute 100% of compensation (Self-employment income for Sole proprietors and partners) up to a specified maximum dollar amount to their Traditional IRA.
 and Roth IRAs Roth IRA

An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first
. These IRAs, which workers create and fund themselves, are subject to an aggregate $1 million exclusion limitation (adjusted for inflation and subject to increase if the bankruptcy judge determines that the "interests of justice so require"). The annual contributions individuals make to traditional or Roth IRAs ranged from $2,000 to $3,000 for pre-2005 years, and to $4,000 in 2005, so there is little danger of debtors' reaching the million-dollar exclusion amount.

Under the new law, a rollover A graphic element in an application or on a Web page that changes its color or shape when the pointer is moved (rolled) over it. See JavaScript rollover. See also n-key rollover.  from a SEP or SIMPLE IRA into an IRA appears to receive only $1 million of protection. Bankruptcy Code section 522(n) allows a general unlimited exclusion for rolled-over qualified retirement plan wealth but does not sanction sanction, in law and ethics, any inducement to individuals or groups to follow or refrain from following a particular course of conduct. All societies impose sanctions on their members in order to encourage approved behavior.  IRC section 408(d)(3) rollovers. Clients with SEP or SIMPLE IRA assets under $1 million can roll over these assets and avoid the potential problems with SEP and SIMPLE IRAs outside of bankruptcy discussed below.

Case law and Department of Labor regulations have held that a qualified retirement plan that benefits only the business owner and spouse was not an ERISA See Employee Retirement Income Security Act.


See Employee Retirement Income Security Act (ERISA).
 plan and did not qualify for ERISA antialienation protections either inside or outside of bankruptcy. The act now eliminates this concern for federal bankruptcy proceedings, as such plans now do qualify.

Practical tip. Because of the unlimited exclusion for qualified retirement plan assets transferred into a rollover IRA, CPAs should always ensure that rolled-over retirement wealth is segregated in a rollover IRA that is distinct from other traditional or Roth IRAs that the debtor may own.


The new act does not address debtors' retirement funds that are involved in state law insolvency insolvency

Condition in which liabilities exceed assets so that creditors cannot be paid. It is a financial condition that often precedes bankruptcy. In the context of equity, insolvency is the inability to pay debts as they become due; insolvency under the balance-sheet
, attachment or garnishment proceedings. In that case a compilation of ERISA, case law and state law comprises the relevant authority. The major concerns are regarding owner-only plans and IRAs. Retirement funds also can be attached through qualified domestic relations orders Qualified Domestic Relations Order (QDRO)

A judgment, decree, or order that gives a pension plan participant access to retirement assets that must be used to pay an ex-spouse or dependent children.
 and federal tax hens in or outside of a bankruptcy.


Employer-sponsored SEP and SIMPLE IRAs are treated differently from individually created and funded traditional and Roth IRAs. ERISA defines a "pension" plan under its jurisdiction as any "plan, fund or program that is established or maintained by an employer that provides retirement income to employees." Typically pension, profit-sharing and section 401(k) plans qualify. The Labor Department The Department of Labor (DOL) administers federal labor laws for the Executive Branch of the federal government. Its mission is "to foster, promote, and develop the welfare of the wage earners of the United States, to improve their working  and the Federal Court of Appeals for the Tenth Circuit (in Garratt v. Walker) held that SEP and SIMPLE IRAs also are ERISA pension plans because they are arranged by the employer, even though the contributions are immediately allocated to the employee's IRA.

Generally, ERISA pension plans receive extensive antialienation protection from creditors. However, this protection does not extend to an IRA, including a SEP or SIMPLE IRA, even if it qualifies as an ERISA pension plan. ERISA also contains specific preemption preemption

U.S. policy that allowed the first settlers, or squatters, on public land to buy the land they had improved. Since improved land, coveted by speculators, was often priced too high for squatters to buy at auction, temporary preemptive laws allowed them to acquire
 provisions that supersede To obliterate, replace, make void, or useless.

Supersede means to take the place of, as by reason of superior worth or right. A recently enacted statute that repeals an older law is said to supersede the prior legislation.
 and void state law protections specifically afforded to retirement arrangements that are ERISA pension plans (ERISA section 514(a)).

Thus, the SEP and SIMPLE IRA are at an impasse im·passe  
1. A road or passage having no exit; a cul-de-sac.

2. A situation that is so difficult that no progress can be made; a deadlock or a stalemate: reached an impasse in the negotiations.
 outside of bankruptcy. They are ERISA pension plans--but do not qualify for ERISA antialienation protections. Moreover, any state law protections may be preempted, and a creditor may be able to bring a successful state action against these assets.


An individually established and funded traditional or Roth IRA is not an ERISA pension plan, so state laws can apply to protect them. Usually the owner's state of residency A duration of stay required by state and local laws that entitles a person to the legal protection and benefits provided by applicable statutes.

States have required state residency for a variety of rights, including the right to vote, the right to run for public office, the
 determines whether the IRA is protected. For example, Ohio law specifically exempts both traditional and Roth IRAs from execution, garnishment, attachment or sale to satisfy a judgment or order, with no cap. For a list of state laws protecting IRAs, go to altieri.htm.

Practical tip. CPAs should advise their clients that assets rolled over from a SEP or SIMPLE IRA into a rollover IRA should, at that point, no longer be part of an employer-maintained arrangement and therefore would lose their characterization A rather long and fancy word for analyzing a system or process and measuring its "characteristics." For example, a Web characterization would yield the number of current sites on the Web, types of sites, annual growth, etc.  as parts of an ERISA pension plan. The rolled-over assets would not then be subject to ERISA preemption and could take advantage of state law protections for non-SEP and SIMPLE IRAs. If there is less than $1 million of such rolled-over wealth, the resulting rollover IRA would be afforded unlimited protections under nonbankruptcy proceedings in states such as Ohio and protected in a bankruptcy proceeding.

As an example, Mark Smith is a small business owner who has $500,000 invested in a SEP IRA established by his company. Under his state's law, assets held in an IRA generally are exempted from any creditor claims. Mark is successfully sued for $300,000 of damages in state court and is not filing for federal bankruptcy protection.

This matter is outside of federal bankruptcy law, and the new bankruptcy protections therefore do not apply. Because Mark's money is in a SEP IRA, it constitutes an ERISA pension plan, preempting any state law directly protecting it, and it would not qualify for the antialienation protections usually afforded ERISA plans. The judgment creditor A party to which a debt is owed that has proved the debt in a legal proceeding and that is entitled to use judicial process to collect the debt; the owner of an unsatisfied court decision.  therefore may successfully attach Mark's IRA.

If Mark transferred the money in his SEP IRA to a roUover IRA, it no longer would qualify as an ERISA pension plan. Thus it would be protected from creditor claims up to $1 million either inside a bankruptcy proceeding or possibly to an unlimited extent outside of bankruptcy under applicable state law.

Note that in Rousey v. Jacoway, the Supreme Court held that IRAs are a "similar plan or contract" to pension and profit-sharing plans Profit-Sharing Plan

A plan that gives employees a share in the profits of the company. Each employee receives into an account, a percentage of those profits based on their earnings. Also known as "deferred profit-sharing plan" or "DPSP".
 under the limited exemption in the Bankruptcy Code. This decision, although largely irrelevant since the new law, may be authoritative in states that protect pension and profit-sharing plans without specifically protecting IRAs. In these states the fact that the Supreme Court equated IRAs with traditional retirement plans might be persuasive in a nonbankruptcy proceeding involving traditional or Roth IRAs.

CPAs should note the change that has occurred since the advent of the new bankruptcy law. Wealth residing in qualified retirement plans (pension, profit-sharing and section 401(k) plans) continues to possess the most extensive debtor protections both in and outside of a bankruptcy proceeding. A distinct IRA into which qualified retirement plan assets are rolled, an asset frequently attacked under pre-act bankruptcy law, would constitute as strong a protected reservoir of wealth under the new post-act unlimited exclusion for such IRAs in a federal bankruptcy proceeding. Similarly, in states providing strong IRA protection (such as Ohio), the rollover IRA would enjoy unlimited protection from creditors in a nonbankruptcy proceeding.


ERISA and the Internal Revenue Code's broad antialienation protections generally have protected a debtor's pension plan, profit-sharing or 401(k) plan benefits from creditor claims both in and outside of bankruptcy. However, under case law and Department of Labor regulations, a plan that benefits only an owner and his or her spouse is not an ERISA plan, and so does not qualify for antialienation protections under Title I of ERISA.

As noted above, owner-only plans are not at risk in bankruptcy proceedings. Outside of bankruptcy, the owner-only category does not apply if nonowner participants are added to the plan. So the easiest way to protect funds in such plans is by adding other participants. Alternatively, one could make the same argument, as was just examined with regard to traditional and Roth IRAs outside of bankruptcy, that since owner-only plans are not ERISA plans, state law protecting retirement plans would not be preempted.


Qualified retirement plans and IRAs are protected under the new bankruptcy legislation. Outside of bankruptcy, ERISA provides nearly unlimited antialienation protection to qualified retirement plans (pensions, profit-sharing and 401(k) plans). State law generally protects traditional and Roth IRAs. SEP and SIMPLE IRAs and owner-only plans, however, require additional planning to insulate in·su·late  
tr.v. in·su·lat·ed, in·su·lat·ing, in·su·lates
1. To cause to be in a detached or isolated position. See Synonyms at isolate.

 them from creditor claims.

Amount of Money in IRAs

IRAs are the single largest component of the U.S. retirement market, holding $3.5 trillion of assets at year-end 2004 (out of a total of $12.9 trillion of retirement plan assets). Investors hold most ($3.2 trillion) of their IRA assets in traditional IRAs, which they fund with rollovers from employer-sponsored retirement plans and/or contributions.

Source: Investment Company Institute, August 2005,


* THE NEW BANKRUPTCY LAW protects tax-qualified retirement plans-pensions, profit-sharing and 401(k) plans--from creditors in bankruptcy.

* SEP AND SIMPLE IRAs ARE excluded from bankruptcy estates under the new law, even if they qualify as ERISA pension plans.

* TRADITIONAL AND ROTH IRAs that are created and funded by an individual are subject to an aggregate bankruptcy exclusion of $1 million.

* SEP AND SIMPLE IRAs, BEING ERISA plans, but not enjoying ERISA antialienation protections, may be subject to attack in a state action, since any protecting state law may be preempted by ERISA.

* TRADITIONAL AND ROTH IRAs are not ERISA pension plans. They are protected in nonbankruptcy proceedings by any state laws specifically protecting IRAs since such state laws are not preempted by ERISA.


AICPA resources

JofA Article

"Protecting Retirement Plan Assets from Creditor Claims"JofA, Apr. 05, page 34,


"Financial Guidance for Every American" by Mark Altieri, CPA/PFS, is available at

Other Resources

* "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," Consumer+Protection+Act+of+2005.htm.

* Bankruptcy Reform Bill,

* Benefits Blog,

* CCH CCH Colegio de Ciencias y Humanidades (Spanish)
CCH Certified Clinical Hypnotherapist
CCH Cook County Hospital
CCH Certified in Classical Homeopathy
CCH Country Club Hills (Fairfax City, VA, USA) 
 Bankruptcy Reform Act Briefing,

Latin Legum Magister (Master of Laws)

LLM Master of Laws [Latin Legum Magister]

Noun 1.
, is an associate professor of accounting at Kent State University, Kent, Ohio Kent is a city in Portage County, Ohio, United States. The population was 27,906 at the 2000 census, making it the county's largest city. Kent is home to the main campus of Kent State University. Nearby metropolitan areas include Akron, Cleveland, Canton, and Youngstown-Warren. , and special tax counsel to Wickens, Herzer, Panza, Cook and Batista in Avon. His e-mail address See Internet address.

e-mail address - electronic mail address
 is RICHARD A. NAEGELE, JD, is an attorney and shareholder at Wickens, Herzer, Panza, Cook and Batista. His e-mail address is rnaegele@
General Debtor Protections for Retirement Assets In and Out of
Federal Bankruptcy

                                                      State law
                          Federal bankruptcy    Attachment/garnishment

Qualified retirement
plans (pension, profit-
sharing, section
401(k))                   Generally complete      Generally complete
Rollover IRAs             Generally complete      Generally complete
Traditional and Roth
IRAs                          $1 million          Generally complete
SEP and SIMPLE IRAs       Generally complete        Probably none

Note: Absolute statements of protection are problematic, as noted in
the body of the article. For example, qualified plan assets and IRAs
are subject to attachment for qualified domestic relations orders and
federal tax liens both in and out of bankruptcy. Additionally,
owner-only plans may be attachable outside of bankruptcy. State law
protections vary from state to state.
COPYRIGHT 2006 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Naegele, Richard A.
Publication:Journal of Accountancy
Date:Jan 1, 2006
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