Retirement plans and creditor claims

There are a number of laws that provide that money in a retirement plan cannot be attached by creditors, either in bankruptcy court or after entry of a civil judgment.

ERISA protects "qualified retirement plans", which include traditional defined benefit plans and 401(k) accounts. Under the ERISA "anti-alienation" provision, 29 USC 1056(d)(1), the funds cannot be "assigned or alienated", and are not subject to attachment to pay the debts of the participant.

For some time, there was uncertainty about the status of IRAs. Since they are not qualified plans and not governed by ERISA, the anti-alienation provision of that law does not apply. The Federal exemption under U.S. bankruptcy law, at 11 USC 541(c)(2), protects money in a "trust", including an IRA, that contains a "restriction on transfer" that is enforceable under "non-bankrutpcy law". In In re Yuhas, 104 F. 3d 612 (3rd Cir 1997), the court, drawing on a 1992 decision of the U.S. Supreme Court involving an ERISA plan, found that an IRA was protected under the bankruptcy law by virtue of the protection afforded under New Jersey law.

Under the bankruptcy system, a debtor is allowed to choose between Federal and state exemptions. Hence, when state exemptions are chosen, the protective provisions of state law must be examined.

In Michigan, the protection from attachment on a judgment is provided under MCL 600.6023(1)(k), and the state protection of IRAs for bankruptcy purposes is found at MCL 600.5451. The protection under both sections applies to both individual retirement accounts and individual retirement annuities. The protection does not extend to any contribution to the account made within 120 days of filing for bankruptcy.

There are some differences. The protection under section 5451 applies to Roth IRAs as well, while section 6023 is silent on Roths. Section 5451 also protects distributions from the accounts after they are made.

There are certain creditors against whom these protections are not effective. The IRS has the power to reach any retirement account of a delinquent taxpayer. Special provisions under sections 401 and 408 of the Internal Revenue Code provide for division or transfer of a qualified retirement plan and IRA by a court in the course of divorce proceedings. The Michigan provision regarding IRAs mentions this exception as well, and further allows the court to order that the funds be used to meet the participant's child support obligations.

For several years, there was an ongoing controversy about whether the protection of IRAs covers only the participant's account. Some litigants argued that the interest of a non-spouse beneficiary in an inherited IRA should not receive the same protection. There have now been a number of Federal and state cases which have held that an inherited IRA is entitled to the same protection from creditors. The most recent such case was In re Chilton, 426 B.R. 612 (E D Tex 2010).