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Compliance Corner
November 2014

The Current Issue: Bankruptcy & Creditor Protection in Qualified Retirement Plans and Individual Retirement Accounts

By virtue of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), the same bankruptcy protection extends to IRAs previously only available through a qualified plan (this protection was also extended to 457(b) plans, 403(b) plans, SEPs and SIMPLEs). Specifically, rollover contributions to IRAs (i.e., those originating from a qualified plan) are now fully protected in the event of a bankruptcy. Non-rollover contributions in IRAs are protected up to $1 million, as inflation adjusted.

An important distinction needs to be made between bankruptcy protection versus creditor protection. As the name implies, bankruptcy protection only occurs when a debtor has filed for bankruptcy. Protection from creditors may be sought without a bankruptcy filing. This distinction is important, though, because the new law only extends bankruptcy protection—not creditor protection—to IRAs. ERISA-covered plans are afforded full creditor protection under a 1992 Supreme Court ruling, (Patterson v. Shumate). However, state law, not federal law, determines creditor protection in non-ERISA plans and IRAs.

Since this area of "creditor protection", both in and out of bankruptcy, is particularly fact and (legal ) Circuit specific, we strongly recommend any plan participant, or plan sponsor, consult competent legal counsel for definitive answers to questions of this kind.



 
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