Asset & Creditor Protection for Your Solo 401k
RETIREMENT accounts have become many Americans' most valuable assets. That means it is vital that you have the ability to protect them from creditors, such as people who have won lawsuits against you.
In general, the asset/creditor protection strategies available to you depend on the type of retirement account you have (i.e. Traditional IRA, Roth IRA, or 401(k) qualified plan, etc.), your state residency, and whether the assets are yours or have been inherited.
Federal Protection for 401(k) Plan Qualified Plan for Bankruptcy
Effective for bankruptcies filed after October 17, 2005, the following rules give protection to a debtor’s retirement funds in bankruptcy by way of exempting them from the bankruptcy estate. The general exemption found in section 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for retirement assets exempt from taxation for Section 401(a) (tax qualified retirement plans—pensions, profit-sharing and section 401(k) plans). Thus, ERISA qualified plans as well as Solo 401(k) plans are afforded full bankruptcy exemption. What this means is that if a participant of a 401(k) Plan declares bankruptcy, his or her 401(k) plan assets will be exempt from the bankruptcy proceeding and could not be attached by the bankruptcy’s estates creditors.
Federal Protection for 401(k) Plan Qualified Plan Funds Outside of Bankruptcy
In the case of a debtor who is not under the jurisdiction of the federal bankruptcy court but rather has become involved in a state law insolvency, enforcement, or garnishment proceeding, the 2005 Bankruptcy Act is inapplicable and the ERISA rules and state laws would govern.
Title I of ERISA requires that a pension plan provide that benefits under the plan may not be assigned or alienated; i.e., the plan must provide a contractual “anti‑alienation” clause. For the anti-alienation clause to be effective, the underlying plan must constitute a “pension plan” under ERISA. Such a plan is any “plan, fund or program which...provides retirement income to employees.” ERISA §3(2)(A).. Therefore, a plan that does not benefit any common-law employee is not an ERISA pension plan. As a result, a Solo 401(k) Plan is not treated as an ERISA Plan.
In addition to the ERISA protection, the Internal Revenue Code Section 401(a)(13(A) provides that “[a] trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated. Thus, a retirement plan will not attain qualified status unless it precludes both voluntary and involuntary assignments.
Note - neither ERISA nor Code protections apply to assets held under individual retirement arrangements, simplified employee pension plans, government plans, or most church plans.
Furthermore, ERISA section 514(a) provides that ERISA supersedes state laws insofar as such laws relate to employee benefit plans. The ERISA anti-alienation and preemption provisions combine to make state attachment and garnishment laws inapplicable to an individual’s benefits under an ERISA-covered employee benefit plan.
There are a number of exceptions to ERISA’s and the Code’s anti‑alienation provisions:
1. Qualified domestic relations orders (“QDROs”), as defined in Internal Revenue Code Section 414(p), may be exempted (Internal Revenue Code §401(a)(13)(B); ERISA §206(d)(3)). This means that retirement plan assets are a marital asset subject to division in divorce and attachment for child support.
2. Up to 10 percent of any benefit in pay status may be voluntarily and revocably assigned or alienated (Internal Revenue Code §401(a)(13)(A); Treas. Reg. §1.401(a)-13(d)(1); ERISA §206(d)(2)).
3. A participant may direct the plan to pay a benefit to a third party if the direction is revocable and the third party files acknowledgment of lack of enforceability (Treas. Reg. §1.401(a)-13(e)).
4. Federal tax levies and judgments are exempted. The Treasury Regulations under Code section 401(a)(13) provide that plan benefits are subject to attachment by the IRS in common law and community property states.
In addition to the statutory exceptions noted above, several court decisions have held that an individual’s retirement plan benefits may be subject to attachment for federal criminal penalties or restitution arising from a crime
Solo 401(k) Plans
A debtor’s plan benefits under a pension, profit-sharing, or section 401(k) plan are generally safe from creditor claims both inside and outside of bankruptcy due to ERISA and the Code’s broad anti-alienation protections. However, case law and Department of Labor Regulations have held that such a plan that benefits only an owner (and/or an owner’s spouse) are not ERISA plans, thus voiding the anti-alienation protections generally afforded to ERISA plans. Thus, state law will govern the protection afforded to Solo 401(k) Plans outside the bankruptcy context.
State Law Protection of Solo 401(k) Plan Assets Outside of Bankruptcy
Because case law and Department of Labor Regulations have held that such a plan that benefits only an owner (and/or an owner’s spouse) are not ERISA plans, thus voiding the anti-alienation protections generally afforded to ERISA plans, state law will govern the protection afforded to Solo 401(k) Plans outside the bankruptcy context.
The following table will provide a summary of state protection afforded to Solo 401(k) Plans from creditors outside of the bankruptcy context.
|State||State Statute||Special Statutory Provision||State Solo 401(k) Plan Exemption from Creditors|
|Alabama||Ala. Code §19-3B-508||Yes|
|Alaska||Alaska Stat. §09.38.017||The exemption does not apply to amounts contributed within 120 days before the debtor files for bankruptcy.||Yes|
|Arizona||Ariz. Rev. Stat. Ann. § 33-1126C||The exemption does not apply to amounts contributed within 120 days before a debtor files for bankruptcy.||Yes|
|Arkansas||Ark. Code Ann. §16-66-220||
16-66-220. Pension and profit-sharing plans.(a)(1) A person's right to the assets held in or to receive payments, whether vested or not, under a pension, profit-sharing, or similar plan or contract, including a retirement plan for self-employed individuals, or under an individual retirement account or an individual retirement annuity, including a simplified employee pension plan, is exempt from attachment, execution, and seizure for the satisfaction of debts unless the plan, contract, or account does not qualify under the applicable provisions of the Internal Revenue Code of 1986. (2) A person's right to the assets held in or to receive payments, whether vested or not, under a government or church plan or contract is also exempt unless the plan or contract does not qualify under the definition of a government or church plan under the applicable provisions of the federal Employee Retirement Income Security Act of 1974. [FN1] (b)(1) Contributions to an individual retirement account that exceed the amounts deductible under the applicable provisions of the Internal Revenue Code of 1986 and any accrued earnings on such contributions are not exempt under this section unless otherwise exempt by law. (2) However, the limitations of subdivision (b)(1) of this section do not apply to an individual retirement account established pursuant to and qualifying under § 408(A) of the Internal Revenue Code.
|California||Cal. Civ. Proc. Code § 704.115||
But only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgement debtor when the judgment debtor retires.
|Colorado||Colo. Rev. Stat. §13-54-102||Exemption applies to ERISA plans and unclear if the creditor exemption would applyto Solo 401(k) Plans.|
|Connecticut||Conn. Gen. Stat. §52-321a||Yes|
|Delaware||Del Code Ann. § 10-4915||Yes|
|D.C.||D.C. Code § 15-501(a)(9) & (10)||Yes|
|Florida||Fla. Stat. Ann. §222.21||Yes|
|Georgia||Georgia Code Ann. § 44-13-100(a)(2.1)||Yes|
|Hawaii||Hawaii Rev. Stat. § 651-124||The exemption does not apply to contributions made to a plan or arrangement within three years before the date a civil action is initiated against the debtor.||Yes|
|Idaho||Idaho Code §§ 11-604A, 55-1011||Yes|
|Illinois||I.L.C.S. § 5/12-1006||Yes|
|Indiana||Ind. Code Ann. § 55-10-2(c)(6)||Yes|
|Iowa||Iowa Code Ann. § 627.6(8)(e), (f)||
Should apply to Solo 401K – statute referenced in case.
|Kansas||Kan. Stat. Ann. § 60-2308||Yes|
|Kentucky||Ky. Rev. Stat. Ann. § 427.150(2)(f)||The exemption does not apply to any amounts contributed to an individual retirement account if the contribution occurred within 120 days before the debtor filed for bankruptcy. The exemption also does not apply to the right or interest of a person in individual retirement account to the extent that right or interest is subject to a court order for payment of maintenance or child support.||Yes|
|Louisiana||La. Rev. Stat. Ann. §§ 20:33(1), 13:3881(D)||Yes|
|Maine||Me. Rev. Stat. Ann. Tit. 14, § 4422(13)(E)||Exempt only to the extent reasonably necessary for the support of the debtor and any dependent.||Yes|
|Maryland||Md. Code Ann. Cts. & Jud. Proc. § 11-504(h)(1)||Yes|
|Massachusetts||Mass. Gen. L. Ch. 235 § 34A; 236 § 28||The exemption does not apply to an order of court concerning divorce, separate maintenance or child support, or an order of court requiring an individual convicted of a crime to satisfy a monetary penalty or to make restitution, or sums deposited in a plan in excess of 7% of the total income of the individual within 5years of the individual's declaration of bankruptcy or entry of judgment.||Yes|
|Michigan||Mich. Comp. Laws Ann. §§ 600.5451(1), 600.6023(1)(k)||The exemption does not apply to amounts contributed to an individual retirement account or individual retirement annuity if the contribution occurs within 120 days before the debtor files for bankruptcy. The exemption also does not apply to an order of the domestic relations court.||No|
|Minnesota||Minn. Rev. Stat. Ann. § 550.37(24)||Protection limited to $60,000 (adjusts for inflation).||Yes|
|Mississippi||Miss. Code Ann. § 85-3-1(e)Applies to solo 401k plans||Yes|
|Missouri||Mo. Ann. Stat. § 513.430.1(10)(e) and (f)||Exemption limited to extent reasonably necessary for support.||Yes|
|Montana||Mont. Code Ann. §§ 19-2-1004, 25-13-608, 31-2-106||Yes|
|Nebraska||Neb. Rev. Stat. § 25-1563.01Should apply to Solo 401(k) Plans unless plan established within two years of action||
Unless plan established within two years of action.
|Nevada||Nev. Rev. Stat. § 21.090(1)(q)||The exemption is limited to $500,000 in present value held in an IRA or Solo 401(k) Plan.||Yes|
|New Hampshire||N.H. Code Ann. § 511:2, XIX||Yes|
|New Jersey||N.J. Stat. Ann. § 25:2-1(b)||Yes|
|New Mexico||N.M. Stat. Ann. §§ 42-10-1, 42-10-2||Yes|
|New York||N.Y. Civ. Prac. L. and R. § 5205(c)||Yes|
|North Carolina||N.C. Gen. Stat. § 1C-1601(a)(9)||Yes|
|North Dakota||N.D. Cent. Code § 28-22-03.1(3)||Retirement funds that have been in effect for at least one year, to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986. The value of those assets exempted may not exceed one hundred thousand dollars for any one account or two hundred thousand dollars in aggregate for all account.||Yes|
|Ohio||Ohio Rev. Code Ann. § 2329.66(A)(10)(b) and (c)||
To the extent reasonable necessary for support
|Oklahoma||31 Okla. St. Ann. § 1(A)(20)||Yes|
|Oregon||42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix)||Yes|
|Pennsylvania||42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix)||100%, except for amounts (1) contributed within 1 year (not including rollovers), (2) contributed in excess of $15,000 in a one-year period, or (3) deemed to be fraudulent conveyances.||Yes|
|Rhode Island||R.I. Gen. Laws § 9-26-4(11), (12)||No protection for non-ERISA qualified plans.||No|
|South Carolina||S.C. Code Ann. § 15-41-30(12)||IRA exemption limited to the extent reasonably necessary for support. For Solo 401(k) Plans, not limited to the extent reasonable necessary for support.||Yes|
|South Dakota||Exempts “certain retirement benefits” up to $1,000,000.||Yes|
|Tennessee||Tenn. Code Ann. § 26-2-105||Distributions 100% exempt to the extent they are on account of age, death, or length of service and debtor has no right or option to receive other than periodic payments at or after age 58.||Yes|
|Texas||Tex. Prop. Code § 42.0021||Yes|
|Utah||Utah Code Ann. § 78-23-5(1)(a)(xiv)||The exemption does not apply to amounts contributed or benefits accrued by or on behalf of a debtor within one year before the debtor files for bankruptcy.||Yes|
|Vermont||12 Vt. Stat. Ann. § 2740(16)||Yes|
|Virginia||Va. Code Ann. § 34-34||Limited to interest in one or more plans sufficient to produce annual benefit of up to $25,000 (pursuant to actuarial table in statute).||Yes|
|Washington||Wash. Rev. Code § 6.15.020||Yes|
|West Virginia||W. Va. Code § 38-10-4(j)(5)||Principal 100% protected. Exemption for distributions limited to the extent reasonably necessary for support.||Yes|
|Wisconsin||Wisc. Stat. Ann. § 815.18(3)||Applies to solo 401k plans but limited to the extent reasonably necessary for the support of the debtor and the debtor’s dependents.||Yes|
|Wyoming||Wy. Stat. Ann § 1-20-110(a)(i), (ii). No statutory exemption for IRAs. – only mentions retirement plans||No statutory exemption for IRAs. – only mentions retirement plans.||Yes|
Asset Protection Planning
The different federal and state creditor protection afforded to 401(k) qualified plans and IRS inside or outside the bankruptcy context presents a number of important asset protection planning opportunities.
If, for example, you have left an employer where you had a qualified plan, rolling over assets from a qualified plan, like a 401(k), into an IRA may have asset protection implications. For example, if you live in or are moving to a state where IRAs are not protected from creditors or have in excess of $1million dollars in plan assets and are contemplating bankruptcy, you would likely be better off leaving the assets in the company qualified plan.
Note - If you plan to leave at least some of your IRA to your family, other than your spouse, the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live. IRA assets left to a spouse would likely receive creditor protection if the IRA is re-titled in the name of the spouse. However, you will likely be able to protect your IRA assets that you plan on leaving to your family, other than your spouse, by leaving an I.R.A. to a trust. To do that, you must name the trust on the IRA custodian Designation of Beneficiary Form on file.
The Solo 401(k) Asset & Creditor Protection Solution
By having and maintaining a Solo 401(k) Plan, the people to whom you owe money - as a result of normal debt, bankruptcy or a civil court judgment – will likely not be able to reach your Solo 401(k) assets to satisfy the debt. However, Solo 401(k) Plan assets are not federally protected from divorce settlements or federal tax liens. As illustrated above, most states will afford Solo 401(k) Plans full protection from creditors outside of the bankruptcy context.
Please contact one of our IRA Experts at 800-472-0646 for more information.
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