Protecting Assets Through
Retirement Plans

Retirement Plan Assets Are Protected From Various Creditor Claims

The federal government protects certain retirement plans from creditor claims. Here are some of the rules in this area:

ERISA Protection

The so-called anti-alienation provisions of the Employee Retirement Income Security Act of 1974 (ERISA) exempts from claims of creditors the assets of pension, profit sharing, money purchase and 401(k) plans.

Two Exceptions: QDROs and Federal Debt Collection Procedure Act

These two actions are not protected by ERISA.

ERISA as Federal Law Trumps State Laws

Because ERISA is a federal law it trumps any state fraudulent transfer law.

Protection Under ERISA Is Limited To Employees

Protection under ERISA protects employee participants of retirement plans. It does not cover employers. An owner of a business is treated as an employer, even though they may be treated as an employee of the same business normally seen in closely held businesses. As a result there is no ERISA protection for sole proprietors, a one man owner business, whether incorporated or not, or partnerships, unless the plans cover employees other than owners, partners and their spouses.

Plans With Anti-Alienation Provisions Under ERISA are Excluded From Bankruptcy Estate

Retirement plans with anti-alienation provisions come within Bankruptcy Code Section 541(c)(2). This provision excludes from the debtor’s estate his beneficial interest in his or her retirement plan. As a result the retirement plan benefits are outside the reach of the bankruptcy courts.

IRAs Not Part of This Federal Protection

IRAs are not given the same federal statutory protection as the retirement plans mentioned above. But there may be state law protections for IRAs. For example, Florida exempts all retirement plan and IRAs from creditor claims.

Pennsylvania’s statute provides protection to IRAs up to $15,000 per year. Contributions over $15,000 per year are not protected and are available to creditors. Note that it is very rare for an IRA to exceed this amount.

Also, the Pennsylvania statutes provide that rollovers from qualified employer plans do not constitute “contributions” for purposes of the $15,000 limit. However a direct transfer from a qualified retirement plan already subject to creditor protection (such as a qualified employer plan) to an IRA retains the same protection.

In any event, you must look to your particular state law to see what type of creditor protection is granted to IRA.