Retirement Plans
§26.39 1. Federal Law
Under the Employee Retirement Income Security Act of 1974 (ERISA) (29 USC §§1001–1461), each qualified retirement plan is required to include an antialienation clause. 29 USC §1056(d). This spendthrift clause prevents creditors of plan participants from reaching retirement plan assets, absent specific exceptions. Patterson v Shumate (1992) 504 US 753, 112 S Ct 2242; Retirement Fund Trust of Plumbing, Heating & Piping Indus. v Franchise Tax Bd. (9th Cir 1990) 909 F2d 1266. The protection afforded under ERISA should apply to a surviving spouse as well. Guidry v Sheet Metal Workers Nat’l Pension Fund (1990) 493 US 365, 110 S Ct 680, superseded by statute on other grounds as stated in U.S. v King (ED Pa, Apr. 2, 2012, No. 08–66–01) 2012 US Dist Lexis 45949 (protection of retirement fund under ERISA was intended to “safeguard a stream of income for pensioners and for their dependents”). But see Sticka v Wilbur (In re Wilbur) (9th Cir 1997) 126 F3d 1218 (court denied state law exemption for retirement benefits to a participant’s ex-spouse when payment was not attributable to period of employment). ERISA does not apply unless a nonowner is covered under the plan. See also Watson v Proctor (In re Watson) (1998) 161 F3d 593 (ERISA did not apply to benefit plan when sole participant was sole shareholder of corporation; accordingly, interest in plan was part of bankruptcy estate). Thus, when the debtor and the debtor’s spouse are the sole participants in the plan, it is not protected by ERISA. Gill v Stern (In re Stern) (9th Cir 2003) 345 F3d 1036, cert denied (2004) 541 US 936. ERISA protection also may not apply to IRC §403(b) plan assets held by an insurance company rather than a trust. See §26.35.

Bankruptcy protection. Most IRS qualified retirement plans are also exempt in bankruptcy. Such plans include IRAs and IRC §457 plans. IRAs are subject to a $1 million limitation (adjusted for inflation), but the cap does not apply with regard to most rollovers from other kinds of plans. 11 USC §522(n) (referring to IRC §§408, 408A, and 408(p), and rollovers described in IRC §§402(c), 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8)). The $1 million cap can also be increased “if the interests of justice so require.” Further, rollovers and trustee-to-trustee transfers will not affect the exemption. 11 USC §522(b)(4)(C), (b)(4)(D). Rollovers must comply with the 60-day period in 11 USC §522(b)(4)(D)(ii)(II). These rules apply regardless of whether a state has opted out of the federal exemption scheme. See §26.40.

Further, the Bankruptcy Code protects amounts withheld by an employer from the wages of an employee or received by the employer from the employee for contributions to a broad range of retirement plans and health insurance plans, including ERISA-qualified plans, governmental plans under IRC §414(d), IRC §457 plans, and IRC §403(b) tax-deferred annuities—generally plans maintained by charitable organizations. Such amounts are excluded from the bankruptcy estate. 11 USC §541(b)(7).

However, the bankruptcy exemption does not apply to inherited IRAs in California and most other states under Clark v Rameker (2014) 573 US 122, 134 S Ct 2242. But see In re Williams (Bankr SD Cal 2016) 556 BR 456 (inherited pension plan payments are exempt under CCP §703.140(b)(10)(E) to the extent reasonably necessary for debtor’s support); In re Sherr (Bankr ND Cal, Sept. 27, 2016, No. 16–10283) 2016 Bankr Lexis 3521 (inherited IRAs are exempt as “retirement funds” under CCP §704.115 to extent necessary for debtor’s support on retirement); In re Kara (WD Tex 2017) 573 BR 696 (inherited IRA exempt under Texas exemption statute that explicitly extended to inherited, tax-exempt IRAs). See §21.13.

ERISA protection. In Nelson v Ramette (In re Nelson) (BAP 8th Cir 2002) 274 BR 789, 792, the court held that an interest in a plan granted under a qualified domestic relations order (QDRO) is also protected by ERISA. The interest of a “beneficiary” is protected by ERISA and a “beneficiary” is defined as “a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.” 29 USC §1002(8). Accordingly, the interest received under a QDRO is protected under ERISA. See also Ostrander v Lalchandani (In re Lalchandani) (BAP 1st Cir 2002) 279 BR 880, 885.

There are, however, at least two decisions to the contrary. See Johnston v Mayer (In re Johnston) (Bankr ED Va 1998) 218 BR 813, 817 (spouse entitled to qualified plan under QDRO not protected by ERISA “because the debtor is not a plan participant or a beneficiary”); In re Hageman (Bankr SD Ohio 2001) 260 BR 852, 857 (interest in pension plan obtained under QDRO not protected under ERISA because debtor’s property interest did not emanate from retirement plan itself but rather from QDRO).

NOTE: The Johnston decision appears to confuse the issue of whether funds distributed are protected (they are not) and whether the money in the plan would be protected. The decision appears wrong to the extent that it holds that assets held by an ERISA plan are not protected from creditors.

The ERISA exemption does not apply after funds have been distributed. Velis v Kardanis (3d Cir 1991) 949 F2d 78, 83. Furthermore, plans that cover only the owner of a business and their spouse are not subject to ERISA, and therefore do not benefit from its safeguards. 29 CFR §2510.3–3. The Ninth Circuit Court of Appeals broadened California’s exemption of Keogh plans (i.e., noncorporate retirement plans) in Moses v Southern Cal. Permanente Med. Group (In re Moses) (9th Cir 1999) 167 F3d 470. In Moses, the debtor’s interest in a Keogh plan was established by a partnership of which the debtor was a member with many others. The court assumed that it was not an ERISA-qualified plan, but held that it was nevertheless an asset-protected trust. This case is suspect because under the California Probate Code a “trust” does not include a trust “for the primary purpose of paying … pensions, or employee benefits of any kind.” Prob C §82(b)(13). Furthermore, it ignores the rule that one can become a settlor through the indirect transfer of property.

§26.40 2. California Law
California law provides its own exemption for IRS-qualified plans (CCP §704.115(b)).

Individual retirement accounts (IRAs) and some Keogh plans—that is, when ERISA does not apply. An individual retirement account (IRA) is not subject to ERISA if no contributions are made by the employer and the employee’s contributions are made voluntarily (29 CFR §2510.3–2(d)) or when the retirement plan covers only the owner and the owner’s spouse (29 CFR §2510.3–3).

NOTE: A Keogh plan is a plan established by a sole proprietorship, partnership or S corporation. If the Keogh plan covers employees other than the sole owner or the owner’s spouse, in the author’s opinion a reasonable inference can be made that these plans are subject to ERISA.

California’s exemption for IRAs and Keogh plans is subject to the “reasonably necessary” standard. CCP §704.115(a)(3), (e). That standard allows an exemption from creditor claims (CCP §704.115(e))

only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the … dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires. In determining the amount to be exempt under this subdivision, the court shall allow the judgment debtor such additional amount as is necessary to pay any federal and state income taxes payable as a result of [satisfying a judgment with IRA funds.]

This standard is generally interpreted to provide for only basic needs, unrelated to the former status in society or lifestyle to which the debtor may have been accustomed. However, the special needs of retired and elderly debtors are taken into account. The following factors are considered in determining the size of the debtor’s exemption:

A debtor’s present and future living expenses;
A debtor’s present and future income;
The age of the debtor and dependents;
The health of the debtor;
The debtor’s ability to work and earn;
The debtor’s job skills, training, and education;
The debtor’s other assets available for support, including exempt assets;
Liquidity of other available assets;
The debtor’s ability to save for retirement;
Special needs of the debtor and dependents; and
The debtor’s other financial obligations.
See, e.g., In re Switzer (Bankr CD Cal 1992) 146 BR 1. See also Moses v Southern Cal. Permanente Med. Group (In re Moses) (9th Cir 1999) 167 F3d 470; In re Herzog (Bankr ND Ohio 1990) 118 BR 529, 532; In re Miller (Bankr D Minn 1983) 33 BR 549, 553; In re Taff (Bankr D Conn 1981) 10 BR 101, 106.

PRACTICE TIP: The difference between the various types of retirement plans may become less important, given the portability of plans under IRC §408(d)(3)(H)(ii)(II). Thus, IRA and Keogh plans could readily be transferred to a C corporation plan to qualify for the greater protection under California law.

Private retirement plans, whether or not qualified under the Internal Revenue Code. To be an IRS-qualified plan, a “private retirement plan” in most circumstances must be sponsored by a C corporation rather than an S corporation, partnership or sole proprietorship. In re Cheng (9th Cir 1991) 943 F2d 1114. This exemption is not subject to the “reasonably necessary” standard. CCP §704.115(a)(1)–(2), (e).

However, California law requires a private plan to be “designed and used” for retirement purposes. O’Brien v AMBS Diagnostics, LLC (2016) 246 CA4th 942 (Section 529 savings accounts are designed and used for educational purposes, not retirement purposes, and not exempt from levy of execution under California law); Yaesu Electronics Corp. v Tamura (1994) 28 CA4th 8, 14 (exemption denied when debtor testified that purpose of plan was to save taxes and provide for his children, and amounts were not in fact used for his retirement). See also Schwartzman v Wilshinsky (1996) 50 CA4th 619, 629 (court considered control over “contributions, management, administration, and use of funds”); Jacoway v Wolfe (In re Jacoway) (BAP 9th Cir 2000) 255 BR 234, aff’d (9th Cir 2002) 284 F3d 1323 (IRA was exempt private retirement plan even though debtor began receiving distributions at age 50 to supplement her income; primary purpose was still to provide for retirement).

State exemptions should protect not only the plan participant, but the surviving spouse as well. See In re Abbatta (Bankr ND NY 1993) 157 BR 201, 204 (state law exemption protected ex-spouse’s interest in plan benefit). But see Sticka v Wilbur (In re Wilbur) (9th Cir 1997) 126 F3d 1218 (court denied state law exemption for retirement benefits to a participant’s ex-spouse when payment was not attributable to period of employment).

Public retirement plan in which debtor spouse has a property interest, when ERISA does not apply. By its terms, ERISA applies only to private retirement plans. See 29 USC §1003(b)(1) (no application to governmental plan). ERISA requires a joint and survivor annuity and preretirement survivor annuity for the participant’s spouse. 29 USC §1055. This requirement preempts state marital property law. 29 USC §1191. These provisions do not apply to public retirement plans. At least one court, however, has held that a debtor spouse’s interest in an employee’s federal retirement plan was not property of the bankruptcy estate and was exempt from administration by the trustee under both state and federal exemption statutes. See Gertz v Warner (In re Warner) (Bankr ND Ohio 2017) 570 BR 582. The parties stipulated that the employee spouse expressly designated the debtor spouse as a beneficiary of the employee’s federal retirement plan. The court also noted that the debtor spouse had a contingent marital property interest in the employee’s federal retirement plan under state law. Therefore, the court held that the debtor spouse’s beneficial interest in the plan was excluded from the bankruptcy estate under 11 USC §541(c)(2), citing Patterson v Shumate (1992) 504 US 753, 112 S Ct 2242, discussed in §26.39.

After distributions have been made. See CCP §703.080 (exempt fund must be traceable to a “deposit account or [be] in the form of cash or its equivalent”) and §704.115(d). Courts have split on the question of whether private retirement plan assets that are transferred to an IRA continue to be completely exempt from levy by judgment creditors under the tracing rule. See McMullen v Haycock (2007) 147 CA4th 753 (more limited exemption applicable to IRAs does not apply to rollover assets). But see In re Mooney (Bankr CD Cal 2000) 248 BR 391 (full exemption for private retirement plan assets must be altered to fit the exemption that applies to the new account into which the funds are transferred). The Mooney court appears to have the better of the argument, because the tracing rule appears to be designed to cover the case of funds transferred to the retiree’s checking account just prior to being spent. For bankruptcy debtors, the question is largely moot because rollover IRAs (and contributory IRAs up to $1 million) are completely exempt under 11 USC §522(b)(3)(C). However, as a result of the McMullen decision, judgment debtors with rollover IRAs in California may not need to file a bankruptcy petition to obtain protection from judgment creditors.

§26.41 B. Life Insurance
The California exemption for life insurance is provided in CCP §704.100, which states that life insurance proceeds are exempt to the extent “reasonably necessary” for the support of the judgment debtor and the dependents. As noted in §26.40, this standard has generally been interpreted narrowly.

The exemption is broad, however, because it can apply to many individuals. The Comment to CCP §704.100 provides that the exemption

is available to the judgment debtor regardless of whether the judgment debtor was the insured or the beneficiary under the policy. This is consistent with prior law. [Citations omitted.] … [T]he exemption may be asserted against creditors of the insured or of the spouse or dependents of the insured.

PRACTICE TIP: If each of these various family members is entitled to assert an exemption, then it may be appropriate to shift some portion of the insurance proceeds to the issue of the decedent. This can be accomplished by a disclaimer. The disclaimer mechanism is especially important because it does not constitute a fraudulent transfer. Prob C §283. See §27.10.

There is authority that an insured’s designation of his or her spouse as beneficiary of a life insurance policy that has not been changed at death makes the policy proceeds the spouse’s separate property even if the premiums had been paid for with community funds. Estate of Miller (1937) 23 CA2d 16, 18; Estate of Lissner (1938) 27 CA2d 570, 577. See Sieroty v Silver (1962) 58 C2d 799, 804 n2, overruled on other grounds in Estate of Baglione (1966) 65 C2d 192, 197; 11 Witkin, Summary of California Law, Community Property §47 (11th ed 2017). This principle is significant if the deceased spouse has creditors. It is unclear whether such a transfer could be deemed a fraudulent transfer. See Ins C §§10132, 10170–10171 (proceeds exempt if clause prohibits payment to creditors).

California provides a number of exemptions for other insurance benefits: disability and health (CCP §704.130), unemployment insurance and strike pay (CCP §704.120), and fidelity bonds (Lab C §404). Homeowner’s insurance on homestead property is exempt for 6 months in the amount corresponding to the debtor’s allowable homestead exemption. See CCP §704.720(b). Matured life insurance benefits are exempt to the extent reasonably necessary for support (CCP §704.100(c)), while the loan value of an unmatured life insurance policy is exempt up to $13,975, with doubling allowed by spouses (CCP §704.100(b)).

§26.42 C. Homestead Exem

Homestead Exemption
Effective January 1, 2021, California’s homestead exemption is the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the year in which the debtor claims the exemption, but not to exceed $600,000. CCP §704.730 (amounts to be adjusted annually for inflation beginning January 1, 2022). The homestead amount applies whether the homestead is claimed in a recorded declaration (CCP §§704.950(c), 704.960(a)) or by asserting the statutory exemption (see CCP §704.720(b)).

NOTE: Under prior law, California used a tiered system for calculating the size of the homestead exemption. Real or personal property used as a residence (including a mobilehome, boat, stock cooperative, condominium, planned development, or community apartment) was exempt to a specific value, depending on the individual debtor. See CCP §704.710; former CCP §704.730. For a single person who is not disabled, the exemption amount was $75,000. Former CCP §704.730(a)(1). The exemption rose to $100,000 for families (former CCP §704.730(a)(2)) and up to $175,000 for debtors age 65 or older (former CCP §704.730(a)(3)(A)). The $175,000 exemption could also be claimed by disabled debtors unable to engage in substantial gainful employment and by low-income debtors over the age of 55. Former CCP §704.730(a)(3)(B)–(C). In September 2020, the California legislature passed AB 1885 (Stats 2020, ch 94) (effective Jan. 1, 2021) to eliminate the tiered system in favor the value-based exemption described above.

The state law homestead exemption is generally limited to an inflation-adjusted $125,000 per debtor in bankruptcy. 11 USC §522(p). See §26.71. However, unmarried debtors with a joint ownership interest in the same homestead are generally entitled to multiple exemptions in bankruptcy, while spouses in California are entitled to only one exemption unless otherwise specifically provided. CCP §703.110(a). Thus, unmarried debtors with a child together each may be entitled to a $100,000 family exemption without exceeding the bankruptcy limitation. But see Rabin v Schoenmann (In re Rabin) (BAP 9th Cir 2006) 359 BR 242 (California registered domestic partners with child limited to one combined homestead exemption because they were “married” judgment debtors under state law).

Sale proceeds received are exempt for 6 months. CCP §704.720(b) (proceeds are not exempt if a homestead exemption is applied to other property). The judgment debtor continues to be entitled to the exemption if the debtor is not currently residing in the homestead, but the debtor’s separated former spouse continues to reside in or exercise control over possession of the homestead. CCP §704.720(d).

§26.43 D. Other California Exemptions
Most of the other exemptions under California law are relatively minor. California has two sets of exemptions available for debtors, found at CCP §§703.010–704.995. The exemption amounts were adjusted effective April 1, 2019, and are scheduled to be adjusted again on April 1, 2022. See CCP §703.150. These include exemptions for the following:

Aid to needy. CCP §704.170 (exempting social services aid), §704.180 (exempting relocation benefits), §704.190 (exempting financial aid to students), §703.140(b)(10)(A) (exempting local public assistance benefits).
Alimony. CCP §703.140(b)(10)(D) (exempt to extent reasonably necessary for support of debtor and any dependent of debtor).
Bank deposits directly deposited from Social Security Administration to $3500. CCP §704.080 (amount increases to $5250 for spouses).
Building materials. CCP §704.030 (exempting building material used for repair or improvement of a residence up to $3500).
Burial plot. CCP §704.200.
Business or professional licenses. CCP §695.060.
California §529 Account funds. CCP §§703.140(b)(12), 704.105 (absolutely for amounts contributed more than 2 years before date of debtor’s bankruptcy petition and up to annual gift exclusion under IRC §2503(b) for amounts contributed within 2 years of filing).
Certain personal property. CCP §704.020 (exempting household furnishings, appliances, provisions, wearing apparel, and other personal effects to extent ordinarily and reasonably necessary for debtor and family of debtor), §704.040 (exempting jewelry, heirlooms, and works of art to aggregate equity of $8725), §704.050 (exempting reasonably necessary health aids), §703.140(b)(2) (exempting motor vehicle to $5850), §704.010 (exempting motor vehicle or proceeds of sale or insurance to $3325; proceeds exempt for 90 days).
Compensation to crime victims. CCP §703.140(b)(11)(A).
Lost future earnings. CCP §703.140(b)(11)(E) (exempting to extent reasonably necessary for support).
Partnership property. Corp C §16504 (right in specific partnership property exempt except on claim against partnership).
Personal injury recoveries. CCP §704.140 (exempting to extent necessary for support of debtor, spouse, and dependent of debtor; if installments are paid then at least 75 percent exempt).
Social Security. CCP §703.140(b)(10)(A).
Tools of trade to $8725 or to $17,450 if both spouses in same trade. CCP §704.060 (exemption includes vehicle used in trade; maximum amount of total exemption for vehicle is $4850, or $9700 if doubling allowed).
Trust funds for correctional facility inmates to $1750. CCP §704.090 (doubling allowed).
Unemployment and disability compensation. CCP §§704.120, 703.140(b)(10)(A).
Union benefits from labor dispute. CCP §704.120.
Veteran’s benefits. CCP §703.140(b)(10)(B).
Wages. CCP §704.070 (exempting 75 percent of paid earnings), §704.113 (exempting vacation credits of state employees; if amounts representing vacation credits paid periodically or in lump sum, then exempting 75 percent, same as paid earnings), §706.011 (earnings defined as compensation payable by employer to employee for personal services, whether in the form of wages, salary, commission, bonus, or otherwise).
Worker’s compensation. CCP §704.160.
Wrongful death recoveries. CCP §§704.150, 703.140(b)(11)(C) (exempting to extent reasonably necessary for support if deceased was spouse or person debtor was dependent on).
§26.44 V. PROTECTING MARITAL AN