Protecting Retirement Accounts

Copyright (c) 2014 Mark Shapiro

For people in the state of California with a judgment against them, a judgment creditor may be permitted to recover their judgment against at least some of their retirement accounts.

This is one of my many judgment-related: I am the Judgment referral expert, not an attorney, and this article is only my opinion based on my experiences in California, please hire a lawyer when you need legal advice.

While certain retirement accounts are protected (for example, profit-sharing plans and 401Ks) because laws tend to protect them; others (For example, individual retirement accounts) may become vulnerable to creditors.

The judgment creditor's ability to collect from a debtor's retirement account is dependent on what the debtor's circumstances are, the type of retirement account it is, and the balance in the account.

An example of a protected retirement pension plan account is a plan that follows the Federal ERISA retirement account laws.

One more type of retirement pension plan is an account protected by the Employee Retirement Income Security Act (ERISA).

Some examples of ERISA-qualified pension plans and benefit plans include 401(K) accounts, group health and life insurance plans, pension and profit-sharing plans, HSAs, HRAs, disability, accidental death benefits, and vision and dental plans.

There are two types of creditors, regular creditors and (IRS tax, child or spousal support QDRO) creditors. When it comes to retirement ERISA accounts, family support or IRS judgment creditors have more rights than common judgment creditors.

California has fewer protections for non-ERISA retirement accounts. When the debtor's retirement account isn't qualified and covered by ERISA, then creditors could potentially levy it.

Non-ERISA accounts which might be susceptible include IRAs (both simple and Roth), SEP and Keogh plans, plans that do not benefit employees, 403(b) plans for employees of a public school or utility, government or church plans, and employer-only plans.

On the judgment debtors (and the debtor's dependent's) side are laws exempting the amount necessary for their support when they retire. That amount gets shielded in the debtor's non-ERISA and IRA retirement accounts. The laws aren't very clear, and different judges might rule differently on identical set of facts.

A court will decide the way to divide the judgment debtor's retirement assets between them and their creditor, based on the debtor's situation. When considering the case, a judge will look at lots of factors including:

1) Does the debtor require any retirement money now?

2) Will the debtor be able to replenish the retirement funds after they get awarded to the judgment creditor?

3) The judgment debtor's age and health.

4) The judgment debtor's current and future earnings.

5) The judgment debtor's present and potential cost of living.

6) The debtor's chances for continuing working and to earn money (including the debtor's education level and skills).

7) The special needs of the debtor or their family.

8) The judgment debtor's ability to save money for retirement.

One debtor example could be their $150K IRA. If the judgment debtor is 39 years of age, healthy and employed, has no dependents, and makes $70K per year; the debtor may not be able to keep their IRA. But, if the debtor is 65 years of age, suffer from heart condition, and do not have a job; the debtor might be able to keep that IRA account.

And, firmly on the debtor's side, are the roll over protection laws. When the judgment debtor moves over funds from a PRP (Private Retirement Plan) or an ERISA account into their IRA, the funds stay one hundred percent exempt. If the judgment debtor can prove the money in their IRA were from an ERISA account or PRP, then that debtor can skip the "necessary for support" tests.

California protects for the majority of private retirement accounts. When the debtor's pension plan does not qualify under ERISA, but is qualified to be a PRP, then it may be completely shielded from judgment creditors. Different from an IRA, the judgment debtor will be able to skip the common "necessary for support" test.

To qualify, a PRP needs to be set up to be a pension plan for employees, having rules in writing limiting dipping into the money, like an ERISA account.

The judgment debtor can't deposit a single large lump sum of money or roll over any individual retirement account money into their PRP. If the debtors use their PRP funds prematurely and to fund non-retirement purposes (such as paying personal expenses and debts), then the funds might lose their exempt status.

A drastic choice for debtors is to file for bankruptcy protection. Bankruptcy laws might allow judgment debtors to keep as much as a million dollars in their individual retirement accounts.

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