In the highly litigious society we live in, the chances of getting sued are quite high. Reasons for lawsuits could range from unpaid debt and automobile accidents to business malpractice. We encourage proactive asset protection planning to keep assets safe. A creditor could go after business assets and personal assets including a debtor’s personal residence. But what about retirement plans?
The good news is that employer-sponsored retirement plans and pensions are protected from creditors under a federal law known as the Employee Retirement Income Security Act of 1974 (ERISA). Generally, under ERISA, retirement plans such as 401Ks, profit sharing plans, and defined benefit plans are protected from lawsuits.
ERISA does not protect retirement plans from Qualified Domestic Relation Orders, taxes owed to the IRS, or when the plan does not have any non-owner employee participants.
Are all retirement plans protected under ERISA?
No, because ERISA does not cover all types of retirement plans, therefore, some retirement plans are vulnerable to creditors and may not offer the best protection for assets. Most notably, individual retirement accounts (IRAs) are not covered and not protected under ERISA. Many states such as Florida, New York, Texas, and Washington provide some or absolute protection against creditors. Some states, like California, apply a discretionary standard to determine whether IRAs are protected. A few states, like New Mexico and New Hampshire, provide no protection for IRAs against judgments and creditors.
We advise all our clients to review their plans to determine whether they are ERISA-qualified, whether the ERISA anti-alienation protection will apply, and if not protected, to examine what can be done to protect the plans.