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

Debtors have hit a fork in the road. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (effective October 17, 2005) clarifies the rights of debtors and expands the protections their retirement assets have in federal bankruptcy proceedings. But outside of federal bankruptcy things remain murky, and there still is uncertainty about whether retirement funds are subject to state attachment and garnishment 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 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 varies. IRAs created under an employer-sponsored IRC section 408 SEP IRAs and SIMPLE IRAs, as well as pension, profit-sharing or 401(k) funds transferred to a rollover IRA, enjoy an unlimited exclusion from the federal bankruptcy estate. The U.S. Bankruptcy Code now also excludes traditional IRAs and Roth IRAs. 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 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 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 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, 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 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 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 provisions that supersede 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 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 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 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 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 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 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 Bankruptcy Reform Act Briefing,

MARK P. ALTIERI, CPA/PFS, JD, LLM, is an associate professor of accounting at Kent State University, Kent, Ohio, and special tax counsel to Wickens, Herzer, Panza, Cook and Batista in Avon. His e-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.
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Article Details
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Author:Naegele, Richard A.
Publication:Journal of Accountancy
Date:Jan 1, 2006
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