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 Guidry v Sheet Metal Workers Nat’l Pension Fund (1990) 493 US 365, 110 S Ct 680, superseded by statute on other grounds as stated in U.S. v King (ED Pa, Apr. 2, 2012, No. 08–66–01) 2012 US Dist Lexis 45949 (protection of retirement fund under ERISA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.