Is Your Retirement Plan Protected?

Protection Trumps ERISA; Can a creditor seize your 401k ERISA plan?

In analyzing whether your 401k ERISA plan is safe, let us revert to a basic philosophy of asset protection; theoretically, no creditor can take what they do not own, or in the case of judgments “ownership is passed” from the debtor to the creditor. This article pertains to all types of pension plans.

If a judge permits an attachment, they have passed ownership and ownership does not necessarily mean custody or possession. Confusing, but a simple explanation works.

•  Joe the Debtor owes John the Creditor a dollar.

•  Jim the Unbiased Third Party is holding five dollars that belongs to Joe.

•  Joe made an agreement with Jim when he gave him the money and that agreement was that Jim would hold the money and could not give the money to anyone but Joe or his assigned beneficiary and this is irrevocable, sealed!

•  When John asks Jim for the dollar, Jim says “Sorry, I have not authority to give you the money.”

You ask the question; who has custody of the retirement money? What are the roles of the players if there is a judgment against the policy owner? Does an employer, an “independent” company, or the government hold your money until you retire? Who has the ultimate authority? Which of these has to hand over the money to a creditor if there is a judgment against the policyholder? Under what jurisdiction is your ERISA safe and unsafe? The answer is a ping-pong match; back and forth, but certain circumstances dictate.

Before we go further, you should have a well-respected asset protection specialist review and overview your personal liability, your family liability and your business liability.

There has been much publicity in the O.J. Simpson case of wrongful death; in an 8.5M judgment for Wrongful Death, O.J. Simpson managed to keep his NFL ERISA plan. One reason is state law. O.J moved to Florida for asset protection and took residence before a creditor could attach and the Goldman’s are private creditors not government entities. This is not to give asset protection a bad name, but O.J. was advised to move to a jurisdiction that would be more helpful for retaining his assets.

This case got everyone confident in ERISA as an asset protection tool.

– this excerpt written by Ryan Fowler

“Contrary to popular belief, ERISA plans are not the holy grail of Asset Protection. Although ERISA’s anti-alienation clauses provide formidable protection against private creditors, they do not protect against federal tax claims, and may not protect against other government claims, as well. This is clearly demonstrated in McIntyre v. USA (9th Cir. App. case No. 98-17192 (2000)). In this case, Jerry McIntyre’s ERISA-regulated pension was subject to a $300,000 IRS levy for taxes owed from 1983-1995. Jerry’s wife, Waltrout, claimed that because they were California residents, she owned half of Jerry’s pension under the state’s community property laws, and since the IRS could only levy against Jerry’s property, her half of the pension should remain untouched. Furthermore, she argued, ERISA’s anti-alienation provisions forbade the IRS from levying protected pensions. The court proved her wrong on both counts. It states:

“…the Internal Revenue Code expressly indicates that no other federal law shall exempt property from the IRS’s authority to levy a delinquent taxpayer’s property… Moreover, ERISA’s anti-alienation clause cannot prevent the IRS from undertaking what would otherwise be a valid exercise of its levy authority … ERISA itself has a saving clause that states: “Nothing in this subchapter [which includes the anti-alienation provision] shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States.” … We think it is plain that the IRS’s authority to proceed against a delinquent taxpayer’s interest in benefits from an ERISA-governed plan is not constrained by ERISA’s anti-alienation provision.”

In regards to Mrs. McIntyre’s claim that the IRS couldn’t levy on her half of the pension fund, the court noted:

“[ California ] Family Code S 910 … establishes that:

‘the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.’”

As if things were not scary enough, the court also said:

“ERISA’s anti-alienation provision plainly does not preempt the operation of California law insofar as it vests in the husband a continuing property interest in his own pension benefits…”

Yes, you read correctly. In some instances, state law can actually pre-empt the ERISA anti-alienation provisions.

The foregoing facts lead us to deduce the following:

– ERISA plans aren’t safe against the IRS. They also are not safe against seizure under any other U.S. law that allows ERISA funds to be forfeit.

– Although laws vary from state to state, if you live in a community property state (especially California ), then a creditor of either spouse can likely reach assets of the entire community estate.

– In certain circumstances, ERISA anti-alienation provisions may be overridden by state law.

If you go back to the example between Joe (the debtor), John (the creditor – independent not the government) and Jim (the unbiased third party), the lesson in asset protection comes full circle. Jim is in a jurisdiction where the laws do not permit him to hand over the money. That being the case John the Creditor has to sue Joe the Debtor in Jim the Unbiased Third Party’s jurisdiction. It just is not likely to happen for a myriad of reasons.

Suppose that Jim the Unbiased Third Party is the government (could be federal, state or bankruptcy). Now a whole different set of circumstances come into play and some force Jim the Unbiased Party to give John the Creditor the money. Case closed –