May 1999 Issue



By Lawrence M. Lipoff, CPA, CEBS, Rogoff & Company, P.C.

The O.J. Simpson civil trial, the judgment entered, and the difficulties the Goldman family encountered collecting the amounts due have generated considerable interest regarding the asset protection aspects of retirement savings. Furthermore, the decision in Patterson v. Shumate [504 US 753, 199 L Ed 2d 519, 112 S Ct 2242 (1992)] protected qualified pension assets from creditors in a bankruptcy proceeding. Therefore, clarification of the basic pension asset protection rules would be useful for creditors and debtors alike.

Pension assets can be categorized as qualified plans, nonqualified plans, and not qualified plans. Generally, nonqualified plans are those that fail the nondiscrimination test of IRC section 416 (c)(2)(A). Not qualified plans are plans like individual retirement accounts, which must meet the requirements of IRC section 408 but are not subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Although qualified and nonqualified plans are subject to Title I, ERISA section 4(b) excludes nonqualified plans from Part 2 of Title I. Since ERISA section 206(d)'s antialienation rules (disqualifying an entire pension plan should payment be made to a participant's or beneficiary's creditor) are applicable to Part 2 only, nonqualified plans do not obtain Federal asset protection.

It is noteworthy that there are two general exceptions to the antialienation rules: Labor section 1056(d) and IRC section 414(p) qualifying domestic relations orders (QDROs) and IRC section 6331 payments against Federal (not state) tax liens. Regarding Federal tax liens, the Internal Revenue Manual states that the IRS will seek judgment only in flagrant and aggravated cases against accounts with annual benefits in excess of $6,000.

A more specific exception exists under Labor section 1056(d)(2), ERISA section 206(d), and IRC section 401(a)(13)(A) for a participant or beneficiary whose benefits are in pay status. The right to future benefit payments may be assigned or deducted for a voluntary and revocable assignment or alienation not exceeding 10% of any benefit payment that does not directly or indirectly defray plan administration costs.

ERISA was enacted to supersede state law regarding pension assets. General Motors Corp. v. Townsend (D.C. Mich. 1976, 468 F Supp 466) ruled that ERISA applies per the supremacy clause of the U.S. Constitution. Mackey v. Lanier Collection Agency [486 US 825, 100 L Ed 2d 836, 108 S Ct 2182 (1988)] said that state asset protection rules will apply as long as the statute does not interfere with ERISA. An initial test is to ascertain that a state statute providing asset protection features for not qualified plans does not mention ERISA or the IRC.

In New York, Civil Practice Law and Rules Article 52, sections 5205(c) and (d), provide strong asset protection for not qualified plans. New Jersey and Connecticut provide similarly favorable asset protection statutes. For states that do not provide these protections, creditors can attack or make a claim against money in these plans. This would be true, whether the money was originally placed in the IRA or rolled over from a pension plan.

Trying to Obtain Judgment

In trying to obtain judgment against an otherwise qualified plan, creditors can attempt to prove that contributions to the plan were in fact fraudulent conveyances or that the plan fails to meet some qualifying test. However, courts appear to be following In re Youngblood [29 F3d 225, 229 (CA5 1994)] and will tend to defer to the IRS and the Department of Labor regarding whether qualification tests have been met rather than to encroach on their areas of expertise. Finally, some commentators believe that a single-employee pension plan for the benefit of the owner of a business is not a qualified plan for asset protection purposes.

Nonqualified plans (like rabbi and secular trusts) are subject to Title I of ERISA without the Federal protections of ERISA section 206(d). They cannot be protected by state law because the supremacy clause of the U.S. Constitution applies to ERISA. Therefore, depending upon the nature of the plan, they are subject to the creditors of either the business establishing the plan or the plan's beneficiary. *

Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Michael D. Schulman, CPA
Schulman & Company

Contributing Editor:
Steven Pennacchio, CPA

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