Protecting Retirement Savings in Trying Times

What You Should Know About Retirement Plan Asset Protection

Asset protection is one of the key areas of concern for a business owner. While many sophisticated strategies are available, certain types of assets enjoy protection that is derived from and closely tied to their nature.  The Bankruptcy Abuse Prevention and Consumer Protection Act, effective as of October 17, 2005, has substantially increased and to some extent simplified bankruptcy protection for retirement plan accounts. In this article, we explore various retirement savings vehicles and the different levels of protection these accounts enjoy under the bankruptcy code and ERISA.

ERISA Qualified Plans

Employee Retirement Income Security Act of 1974 (ERISA) contains special creditor protections, known as “anti-alienation provisions” that shield assets of almost all qualified retirement plans, including profit-sharing, money purchase, defined benefit, and 401(k) plans from any creditor. ERISA’s anti-alienation provisions have been litigated all the way to Supreme Court on several occasions, and each time the Court has held that the plan’s assets are not available to a participant’s creditors.  There are a couple of minor exceptions to the general blanket protection for qualified plans.

One exception deals with the rights of the participant’s spouse (or former spouse) in divorce or separation to receive a portion of the participant’s assets via a Qualified Domestic Relations Order, or QDRO. Another exception applies to plans that do not include any non-related rank-and-file employees. These “owner-only” plans provide limited protection that is further explained below.

One final exception is not an exception per se but has to do with the definition of a qualified plan. Qualified plans do not include either Individual IRA accounts (Traditional, Roth or Rollover) or employer-sponsored IRA-based retirement programs (such as SEP and SIMPLE plans).  These accounts are generally treated similarly to owner-only qualified plans and enjoy varying degrees of protection from creditors depending on the account type.  Certain tax obligations and some criminal penalties can be paid from plan assets, but these situations are uncommon.

Owner-Only Plans, Rollovers, and Employer Sponsored IRAs

SEP, SIMPLE, and qualified plans that include only owner participants are not covered under ERISA’s anti-alienation provisions. Although not covered under ERISA, assets in these accounts do enjoy tremendous protection against most creditors. Outside of bankruptcy, the degree of protection is tied to state law.  Most states provide some protection for these assets, but the actual amount that can be protected will vary from the entire account balance to less than $50,000 in some states.

If an individual is facing bankruptcy, the assets held in these accounts will be protected from their bankruptcy creditors. Prior to 2005, the law in this area was unclear. In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which provided unlimited protection to assets held in SEP plans, SIMPLE plans, qualified plan rollover balances, and owner-only qualified plans if the account holder files for bankruptcy protection. For those who reside in states with poor protection for these types of accounts, a bankruptcy filing may be appropriate to protect these assets from creditors. More limited bankruptcy protection is offered to traditional individual IRA and Roth IRA accounts.

Traditional IRA and Roth IRA Accounts

Assets accumulated as a result of traditional or Roth IRA contributions or as a result of contributions to a SEP or SIMPLE plan that has terminated are protected to the extent allowed under state law.   They are also protected under the bankruptcy code because of BAPCPA. However, the bankruptcy code only protects the account balances up to $1,000,000 (as opposed to the unlimited protection for SEP and SIMPLE IRAs, qualified plan rollover balances, and owner-only qualified plans).  Since most individuals are unlikely to have IRA account balances in excess of $1,000,000, unless the account includes qualified plan rollovers which are not subject to the limit, the limit is unlikely to be exceeded. However, because of the different rules that apply depending on the source of the funds in the IRA, it is important to retain records that would allow you to track the origin of IRA account balances.

Practical Application of the Rules

Qualified plans clearly offer the best asset protection for those facing economic challenges. There is no requirement to seek bankruptcy protection to fully protect their assets, no matter how large an account balance or plan benefit.  Tax law changes in 2001 allowed taxpayers holding deductible IRA, SEP and SIMPLE plan accounts to roll them into a qualified plan.  While the creditors might challenge the transaction, the law appears to support full ERISA protection for these assets if they are rolled into a qualified plan. Therefore, if one has the ability to roll IRA accumulations into a qualified plan that strategy appears to offer the most security.

It is not uncommon for those facing serious financial difficulty to consider accessing their IRA or qualified plan assets to help meet their financial obligations. While an IRA distribution or qualified plan loan may appear to offer a financial lifeline, accessing these funds may be ill-advised, especially if it would trigger the 10% early withdrawal penalty on the distribution or in the event of a loan default.

Many affluent, especially small business owners, are pitched various asset protection strategies.  For most, the best asset protection comes from simply maintaining a qualified plan.  In addition to the tax benefits, with proper planning, you may be able to hold onto these savings through even the most trying of financial challenges.

Have questions about today’s article? Want to know more about benefits of a Qualified Retirement Plan? As always, your First Allied Retirement Services subject matter experts are ready to help. Call us at 888-926-0600 or send a message to