An interesting question is the extent to which creditors can reach non-probate assets. A deceased participant’s interest in a qualified plan or IRA, including an insured death benefit, is a dramatic species of non-probate asset. Just because an asset is a non-probate asset does not mean that it is automatically exempt from the decedent's debts, but in many instances this may be the result. Recall that there is at least one significant species of property that is a probate asset in the sense that it is subject to testamentary disposition, and yet is not subject to administration without the consent of the surviving spouse, viz., the decedent's interest in the surviving spouse's special community estate.
The courts have long held qualified plan assets to be exempt from execution by creditors, if the debtor is not in bankruptcy.[1] In the case of Patterson v. Shumate[2] a unanimous United States Supreme Court held that a participant’s benefits under a qualified pension plan cannot be reached by creditors in a bankruptcy proceeding. Prior to this decision the courts were divided on this issue.[3]
Since the issue has now been resolved, one may justifiably ask whether there is much point in understanding the issues that had formerly given the lower courts so much trouble. The answer is that the principles involved and their resolution have application in other contexts with which we still must be concerned. For example, there remain numerous retirement type arrangements that are not covered by the Shumate decision. Shumate only covers qualified pension plans subject to Part 2 of Title I of ERISA.[4] As discussed in detail below, Shumate does not apply to welfare benefit plans, nonqualified plans or other plans that are not pension plans governed by Title I of ERISA.
Perhaps the reason that the creditor claims issue had been vexing the lower courts for so long is that its resolution involves the interaction between Bankruptcy Code §541(c)(2) (the exclusion provisions), Bankruptcy Code §522 (the exemption provisions), ERISA §206(d) (the labor law anti alienation rule), ERISA §514(a) (the federal preemption provision), ERISA §514(d) (the federal non impairment provision), IRC[5] §401(a)(13) (the income tax anti alienation rule), and state exemption laws, each of which has its own legislative history. It is easy to see how the thread that holds these statutes together could be lost in the skein. To an extent, the Supreme Court in Shumate made an end run around most of these statutes by simply finding that ERISA §206(d) (the anti alienation rule) was included in Bankruptcy Code §541(c)(2) (the exclusion provisions), thus obviating the need for further analysis. We will attempt to do more here in order to formulate principles of broader application.
To understand the problem and its resolution, one must be familiar with at least six statutes.
We begin with ERISA §206(d)(1): “Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” IRC §401(a)(13) is similar: “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.” The language required by ERISA §206(d)(1) and IRC §401(a)(13) is sometimes referred to as an “anti alienation clause.” Similar language found in most common law trusts is commonly known as a “spendthrift clause.”
ERISA §206(d)(1) is found
in Part 2 of Title I of ERISA. Note now for future reference that Part 2 does not apply to all employee
benefit plans. For example, Part 2 does not apply to “employee welfare
benefit plans,”[6] nor does
it apply to most nonqualified plans,[7]
government plans or most chu
Before proceeding further, it might be useful to discuss and dispose of two issues that do not appear to have bothered the courts, but that might confuse the reader if ignored altogether: (1) Does the fact that benefits may not be assigned or alienated (implying a voluntary act) mean that they are not subject to involuntary alienation? Stating the issue another way: by providing that benefits “may not be assigned or alienated” has the plan made it clear that benefits are not subject to attachment, garnishment, execution, etc., by creditors? The first case clearly denies anyone the power to directly alienate the property; the second means that the property is not even indirectly alienable. (2) One might also reasonably wonder whether a law that requires that a plan contain certain language necessarily means that the language is the law. In other words, if the law requires a plan to say that benefits may not be alienated, does it follow that the law will not allow the benefits to be alienated?
At the risk of sounding nibbling, it would have been more
reassuring on both points if ERISA had also provided that pension benefits “may
not be anticipated, assigned (either at law or in equity), alienated or subject
to attachment, garnishment, levy, execution or other legal or equitable
process,” or something similar. The regulations to IRC §401(a)(13) attempt to
fill this deficit, and the quoted language can in fact be found there.[10]
These regulations were cited with approval in Shumate[11]
and the two issues raised above, stated slightly differently, were effectively
dismissed by the Court.[12]
Therefore, it is clear that if ERISA
§206(d)(1) applies to the plan, the benefits under the plan are simply not
alienable.
Although a state shield law may provided otherwise, ERISA
certainly does not protect assets or benefits after they have been distributed,
even if they were exempt while held in a qualified trust.
In the Third Circuit, payouts from ERISA plans constitute a
distribution, subject to the reach of creditors. In Velis
v. Kardanis, 949 F.2d 78 (3d Cir.1991) (rehearing
denied), the question was whether a debtor could exclude from the estate his
interests in a pension plan, a Keogh plan, and an IRA. In that case the debtor
had borrowed from the plans. The Court
of Appeals for the Third Circuit stated: Even if pension plan assets in the
hands of a [pension] trustee are beyond the reach of creditors because not a
part of the debtor's estate under § 541(c)(2), distributions made from the plan
to the debtor would not enjoy such protection, in the absence of exemption
under § 522(d)(10)(E). 949 F.2d at 81-82.[13]
[Emphasis added.]
The real question in Shumate was whether ERISA §206(d)(1) applied in bankruptcy. The question was answered categorically in the affirmative. Why was this an issue and on what basis was it decided? We proceed to Bankruptcy Code §541.
Bankruptcy Code §541(a)[14] describes the property that comprises the bankruptcy estate. This list is generally very inclusive. For example, “except as provided in subsections (b) and (c)(2) of this section, [the property of the bankruptcy estate includes] all legal or equitable interests of the debtor in property as of the commencement of the case.”[15] The (c)(2) referred to is Bankruptcy Code §541(c)(2), which states:
“a restriction on the transfer of a beneficial interest of the
debtor in a trust that is enfo
Is ERISA nonbankruptcy law? For reasons not apparent on the face of the statute and that would therefore be unclear to the uninitiated, many if not most courts had, prior to Shumate, held that ERISA is not applicable nonbankruptcy law and that applicable nonbankruptcy law means “State law,” or even more narrowly, “State spendthrift trust law.”[17] The basis of the controversy is not found in the statutes, but in the legislative history to §541(c)(2):
“Paragraph (2) of subsection (c) . . preserves restrictions on
transfer of a spendthrift trust to the extent that the restriction is enfo
An introduction to the House report states that the new Bankruptcy Code:
“continues over the exclusion from property of the estate of the debtor’s interest in a spendthrift trust to the extent the trust is protected from creditors under applicable state law.”[19]
The Supreme Court in Shumate disposed of the legislative history argument by stating:
“These meager excerpts reflect at best congressional intent to include state spendthrift trust law within the meaning of ‘applicable nonbankruptcy law.’ By no means do they provide a sufficient basis for concluding, in derogation of the statute’s clear language, that Congress intended to exclude other state and federal law from the provision’s scope.”[21]
A short, but effective, concurring opinion by Justice Scalia rebuked the lower courts for having so muddled an issue that he believed should have been clear to all. “When the phrase ‘applicable nonbankruptcy law’ is considered in isolation, the phenomenon that three Courts of Appeals could have thought it a synonym for ‘State law’ is mystifying.”[22]
Much more could be said on the subject of how and why prior to Shumate several courts had held that ERISA was not applicable nonbankruptcy law, but the main point is that the Supreme Court has now spoken: ERISA §206(d) (the anti alienation provision) is applicable nonbankruptcy law, and qualified plans governed by ERISA are therefore not subject to creditor claims.
Shumate is
interesting for other reasons having more to do with judicial philosophy than
anything else. The case has already been cited several times, and more often
than not it has been cited not for the ERISA bankruptcy holding but for the
general proposition that courts should give a plain and natural reading to a
statute and should not sea
Since ERISA is now known to be applicable nonbankruptcy law,[23] there is generally no necessity for proceeding to Bankruptcy Code §522.[24] However, before this was revealed, Bankruptcy Code §522 was the next place to go once it was determined that state spendthrift law (and hence Bankruptcy Code §541(c)(2)) did not apply.
Bankruptcy Code 11 USC §522(b) provides that “notwithstanding section 541 of this title, an individual may exempt from property of the estate the property listed in either paragraph (1) or, in the alternative, paragraph (2) of this subsection.”
Paragraph (1) refers to a list found in §522(d). The exemptions listed under §522(d) are limited. §522(d)(10)(E) includes “a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless . . .” It had been suggested that the existence of a limited exemption in §522 is inconsistent with a total exemption under Bankruptcy Code §541(c)(2) via ERISA §206(d)(1). However, as noted below in detail, and as also noted by the Shumate Court,[25] there are many plans of deferred compensation that are not subject to ERISA §206(d)(1), and in those cases §522(d)(10)(E) would not be superfluous at all.
§522(b)(2) exempts property that is exempt under state or local law. All but a handful of states have some sort of shield laws protecting, to a greater or lesser extent, a participant’s interest in an IRA and other retirement arrangements.[26] State shield laws are to be distinguished from state spendthrift trust laws. Interestingly, because of the legislative history, the application of state spendthrift trust law was thought to be an issue solely under §541(c)(2), not under §522(b), and contrariwise, state shield laws, if applicable, were thought to apply solely under §522(b)(1) and not at all under §541(c)(2). That basis for the distinction, though well established, is not readily apparent by simply reading the statutes.
Texas Property Code §42.0021 purports to exempt qualified plans and IRAs (including rollover IRAs) from execution by creditors.
Texas Property code §42.0021 reads word for word as follows:
Ҥ42.0021. Additional
Exemption for Retirement Plan
“(a) In addition to the exemption prescribed by
Section 42.001, a person’s right to the assets held in or to receive payments,
whether vested or not, under any stock bonus, pension, profit-sharing, or
similar plan, including a retirement plan for self-employed individuals, an
under any annuity or similar contract pu
“(b) Contributions to an individual retirement account or annuity 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. Amounts qualifying as nontaxable rollover contributions under Section 402(a)(5), 403(a)(4), 403(b)(8), or 408(d)(3) of the Internal Revenue Code of 1986[30] are treated as exempt amounts under Subsection (a).
“(c) Amounts distributed from a plan or contract entitled to the exemption under Subsection (a) are not subject to seizure for a creditor’s claim for 60 days after the date of distribution if the amounts qualify as a nontaxable rollover contribution under Section 402(a)(5), 403(a)(4), 403(b)(8), or 408(d)(3) of the Internal Revenue Code of 1986.[31]
“(d) A participant or beneficiary of a stock
bonus, pension, profit-sharing, retirement plan, or government plan is not
prohibited from granting a valid and enfo
“(e) If subsection (a) is declared invalid or
preempted by federal law, in whole or in part or in certain ci
In Youngblood v. FDIC[32] a
bankruptcy creditor challenged the exemption claimed by the debtor for his
rollover IRA. The reason for the challenge was the assertion by the creditor
that the plan that was the sou
The creditor, however, convinced the bankruptcy court and the
federal district court that, because of the two prohibited transactions, the
plan was not “qualified,” and because the plan was not “qualified” it was not
exempt under the
Note that a qualified plan is not automatically disqualified simply because of an isolated prohibited transaction. An IRA, on the other hand, ceases to be an IRA as of the first day of any year in which a transaction prohibited by §4975 occurs.[33]
In determining whether the exemption applies, the
In reaching its decision, the 5th Ci
“We are persuaded that the legislature
intended for its own state courts (or bankruptcy courts applying
A state shield law, such as Tex. Prop. Code §42.0021 protecting IRAs, will be of no avail if the account ceases to qualify as an IRA because of an act of self-dealing:
IRC §408(e)(2) provides:
“If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year.”
As discussed elsewhere, IRC §4975(c)(1) provides:
(1) General rule. For purposes of this section, the term “prohibited transaction” means
any direct or indirect --
(A) sale or exchange, or leasing, of any property between a plan
and a disqualified person;
(B) lending of money or other
extension of credit between a plan and a disqualified person;
(C) furnishing of goods,
services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a
disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he
deals with the income or assets of a plan in his own interest or for his own
account; or
(F) receipt of any consideration
for his own personal account by any disqualified person who is a fiduciary from
any party dealing with the plan in connection with a transaction involving the
income or assets of the plan. [Emphasis added.]
The following is a partial list of other possibly relevant authorities:
Ancira, 119 TC No. 6 (2002).
Albert Lemishow v. Commissioner, 110 TC 110 (1993).
Youngblood v. FDIC, 29 F.3d 225; 74 AFTR 2d 5910, (5th Cir. 1994).
Gerald M. Harris, TC Memo 1994-22.
In re Robert J. HIPPLE, Debtor. 225 BR
808,
In re Robert J. HIPPLE, Debtor. --- B.R.
----, 1997 WL 1038201,
Eisenberg v. Houck 181 BR 187, 33 CBC2d
734, 1995 WL 234714,
ERISA
Opinion Letter 82-24A ,
Treas. Reg. §1.408-4(d).
Treas. Reg. §1.408-1(c)(2)(i).
Treas.
Reg. §1.408-6(d)(4)(iii)(B)(1).
Prohibited
Transaction Class Exemptions (PTCE) 97-11, PTCE 93-33, and amendment to PTCE
97-11, 64 FR 1042; and Amendment to PTCE 93-33, 64 FR 1044.
Property Code §§121.051 and 121.055 exempts certain employer sponsored death benefits, including nonqualified salary continuation arrangements, from execution by creditors. Query whether this exemption is preempted by ERISA in those cases where the benefits are either an employee pension or a welfare benefit plan under ERISA.[35]
§514(a) of ERISA (the preemption provision) provides, in part:
"Except as provided in subsection (b) of this section, the provisions of this title [title I] and title IV [PBGC] shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) and not exempt under section 4(b)." (Emphasis added.)
ERISA §514(c)(1) provides, in part:
"The term 'State law' includes all laws, decisions, rules, regulations, or other State action having the effect of law, of any State."
§514(d) of ERISA (the non impairment or savings provision) provides in part:
“Nothing in this title shall be construed to alter, amend, modify,
invalidate, impair or supersede any law of the
As indicated above, prior to Shumate, the usual practice of the courts that did not consider ERISA §206(d) to be applicable nonbankruptcy law was to look solely to state spendthrift trust law for an exclusion via Bankruptcy Code §541(c)(2). Virtually every state gives spendthrift trust protection to trusts that contain anti alienation language, but no state grants unlimited spendthrift trust protection to self settled trusts (where the grantor is also a beneficiary).
The courts were in agreement that if a qualified plan was a valid spendthrift trust under state law it would be protected in bankruptcy by §541(c)(2). However, if the participant controlled the plan or the employer in any fashion, then the courts were quick to find that state spendthrift trust law did not apply.[36] Since a professional almost always has some control over either the plan or the employer, state spendthrift trust law was seldom of benefit to the professional participant.
If state spendthrift law offered no protection under
§541(c)(2), the courts were fo
As one might imagine, a construction of the Bankruptcy Code that called for a reference to state law that might be preempted complicated the problem by several orders of magnitude. Like two mirrors facing each other with an endless series of reflections and counter reflections (reminiscent of the renvoir argument familiar to students of conflict of laws principles), the interaction of the preemption clause with two federal statutes said to incorporate state law made for a convoluted web, definitely not seamless.
An important recent pre-Shumate case (Heitkamp v. Dyke
(In re Dyke)) wrestled mightily with the preemption demon.[37]
The issue was whether the
Bear in mind that if a plan or arrangement is not subject to ERISA at all, then preemption simply isn’t an issue. However, the plan may be subject to Title I of ERISA, including the preemption rule, but not be subject to the anti alienation provision in Part 2 of Title I. This is the subject to be explored next. Title I is the heart of ERISA. The function of Title II is merely to amend the Internal Revenue Code. A point emphasized in this outline is that (1) a plan may be subject to Title II without being subject to Title I, and further, (2) a plan may be subject to the Title I preemption provision without being covered by the anti alienation provision in Part 2 of Title I.
ERISA §4 provides:
“(a) Except as provided in subsection (b) and in sections 201, 301, and 401, this title shall apply to any employee benefit plan if it is established or maintained-
“(1) by any employer
engaged in comme
“(2) by any employee
organization or organizations representing employees engaged in comme
“(3) by both.
“(b) The provisions of this title shall not apply to any employee benefit plan if-
“(1) such plan is a governmental plan (as defined in section 3(32));
“(2) such plan is a chu
“(3) such plan is maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws;
“(4) such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens; or
“(5) such plan is an excess benefit plan (as defined in section 3(36)) and is unfunded.”
In order for Shumate
to be helpful, i.e., in order to reap the benefit of the ERISA §206(d) anti
alienation rule, the plan must be subject to ERISA, or more specifically, to
Part 2 of ERISA. Many plans are not. Excess only plans, most chu
A recent unpublished 7th Ci
Welfare benefit plans are employee benefit plans that are not
employee pension or profit sharing plans. The terms “employee welfare benefit
plan” or “welfare plan,” as used in ERISA, mean any plan, fund, or program
which provides, through the pu
Welfare benefit plans are not pension plans, and the ERISA §206(d) anti alienation rule only covers pension plans.[46] Further, ERISA §201(1) makes it clear that Part 2 does not apply to welfare plans in any event. However, welfare plans (if they cover common law employees) are subject to ERISA generally, including the preemption rule which in this context applies with a vengeance.
In MacKey v. Lanier Collection Agency and Service,
Inc., 486 U.S. 825 100 L. Ed.2d 836, 108 S. Ct. 2182, (1988), the United
States Supreme Court held that Georgia was preempted from excluding ERISA welfare
plans from the application of its own (Georgia's!) garnishment law. (
Some nonqualified plans are not covered by ERISA at all (and thus are not subject to preemption) while others clearly are. However, those that are covered by ERISA preemption are usually not covered by the ERISA anti alienation rule. As indicated in MacKey, this is not the best of all possible categories in which to fall.
Unfunded “excess benefit
plans,”[47] as
well as all governmental and most chu
There is another type of nonqualified plan, sometimes called a “top hat plan,” which, although covered by ERISA, is exempt from most of the more burdensome provisions of Title I, such as funding, vesting and most reporting.[49] These plans are not covered by Part 2 of ERISA and thus, are not covered by the ERISA §206(d) anti alienation rule; they are covered by the preemption rule however.
Since the plan is unfunded, it is fair to ask what there is to attach. Presumably, a creditor could get an order similar to a garnishment order that would cause the benefits when paid to be paid to the creditor.
An IRC §457 plan is a species of top hat plan. §457 limits the benefits which may be provided by a nonqualified unfunded plan established by a tax exempt organization for its highly compensated employees. In order to avoid the §457 limitations, the nonqualified plan must be subject to a substantial risk of forfeiture.
If the plan is not an excess benefit plan and is not for a select group of management or highly compensated employees, then whether or not qualified, the funding and vesting rules must be met and Part 2 of ERISA (including the anti alienation rule) would also apply.
Tax sheltered annuities (also known as §403(b) plans) are similar in operation to §401(k) plans, but they are only available to employees of school systems and §501(c)(3) charities. They are not “qualified plans” as such and are not directly covered by IRC §401(a). Most tax sheltered annuity plans these days have little to do with annuities and are instead maintained as custodian accounts under IRC §403(b)(7), investing participants’ individual accounts in regulated investment company stock. These plans are beginning to look and feel more and more like profit sharing plans every day, and it may be safe to assume that most are in fact subject to Title I. That is not to say that the matter is entirely free from doubt. According to Department of Labor regulations, whether or not a 403(b) plan is subject to Title I of ERISA is a function of the degree of employer involvement, including whether the employer is contributing to the plan.[50] Thus if the 403(b) plan provides for employer discretionary or matching contributions, the plan is probably subject to ERISA Title I. Presumably, if a 403(b) plan is subject to Title I, it is also subject to Part 2 of ERISA, including the ERISA §206(d) anti alienation rule, even though it is not subject to the IRC anti alienation rule of §401(a)(13).
An IRA (including a SEP-IRA) is not a qualified plan because it is not described in IRC §401(a). Taxation of IRAs is governed by IRC §408.
An IRA is generally not subject to Title I because an IRA does not constitute an employee benefit plan.[51] It has been successfully argued, however, that a SEP is an employee benefit plan, subject to certain parts of ERISA.[52] There are good reasons for this.
For one thing, SEPs are employer funded.[53] Labor Reg. §2510.3-2(d) interprets ERISA as not covering IRAs if certain conditions are met, one of which is that “no contributions are made by the employer.” SEPs used to be structured so that contributions were treated as having been made by the employee; i.e., the employee reported the contribution as income and then took a deduction for it. The 1986 Tax Reform Act (P.L. 99-514) changed that. Now, the contribution is presumably to be made by the employer and excluded by the employee.[54] According to the TRA ‘86 Blue Book, this was not meant to change prior law with respect to Title I coverage of SEPs, whatever that means.[55]
IRC
§408(k) describes SEPs (Simplified Employee Pensions) as a form of IRA:
(k)
Simplified employee pension defined.
(1)
In general. For purposes of this title, the term “simplified employee
pension” means an individual retirement account or individual retirement
annuity—
(A) with respect to which the requirements of paragraphs (2), (3), (4), and (5) of this subsection are met, and
(B) if such account or annuity is part of a top-heavy plan (as defined in section 416), with respect to which the requirements of section 416(c)(2) are met.
(2)
Participation requirements.
* * * *
(3)
Contributions may not discriminate in favor of the highly compensated, etc.
* * * *
(4)
Withdrawals must be permitted. A simplified employee pension meets the
requirements of this paragraph only if—
(A) employer contributions thereto are not conditioned on the retention in such pension of any portion of the amount contributed, and
(B) there is no prohibition imposed by the employer on withdrawals from the simplified employee pension.
(5)
Contributions must be made under written allocation formula.
* * * *
Is it relevant to
distinguish the “pension” from the “plan”? In the case of a qualified plan
this would not be something one would be likely to get too hung up over. But here it is critical. The way SEPs work in operation (I think!) —though you cannot really
discern this from reading 408(k) alone— is that the employer puts money into
IRAs either established by the employer in the employee’s name or established
by the employee, again in the employee’s name, who directs the employer where
to send the check. I confess that I have always considered the IRA into
which the check was deposited to be no different from any other IRA in any
meaningful sense.
Note that 408(k)(4) requires that a participant have an
unlimited withdrawal right (a poor person’s 401(k) with no ADP test!). So even
if a SEP-IRA is different from a regular or traditional IRA, the employee could
have a standing instruction to transfer each deposit into an IRA that clearly
was not a SEP-IRA. The fact that this seems to be such a silly exe
The reason that it is important to know whether the IRA (the
pension benefit) is different from the “plan” is that the plan may very
well be subject to ERISA —á lá
Labor Reg. §2510.3-2(d)—, while the benefits
(the IRAs), are not. If both the plan and the benefits (after the benefits
have, in effect, been distributed under it[56])
are subject to ERISA, then we have the not very taxpayer friendly result that the ERISA anti-alienation provision does
not apply, and that state shield laws are preempted.
Like IRAs, SEPs and §403(b) plans are not qualified plans; nevertheless they do enjoy many of the tax benefits of qualified plans. However, since a SEP is a form of IRA, it ought to be able to enjoy the specific IRA exemption from Parts 2 (participation and vesting) and 3 (minimum funding) of ERISA.[57] But since the anti-alienation rule is also found in Part 2,[58] the exemption from Part 2 does have a down side. There is no specific exemption for IRAs and SEPs under the preemption provision of ERISA[59] in the unusual case where the IRA or SEP was subject to Title I in the first place.
One would hope that the SEP-IRA into which a contribution is made under the plan that funds the SEP —the IRA being the benefit provided by the plan— is not itself going to be subject to ERISA at all, even though the “Plan” probably is. If this is true, then unfortunately for the IRA owner, the ERISA anti alienation rule will not apply, but fortunately, neither will the preemption rule,[60] and hopefully, state shield laws will apply, and most states have shield laws exempting IRAs from creditor claims to various extents.[61] However, if the IRA itself, the pension benefit, is subject to ERISA in the same sense that the plan is subject to ERISA, this would be unfortunate, because IRAs are specifically exempt from Part 2 of ERISA,[62] which is where the anti-alienation protection is found.[63] In sum, if the SEP-IRA is itself an employee benefit plan —and therefore subject to Title I— it would be subject to the preemption[64] but not to the anti-alienation provisions[65] of ERISA, the worst of both worlds, so to speak. The result I would like to see is that the SEP itself is subject to ERISA, but not the IRA into which the contributions are shunted.
The latest development in this area is Lampkins v. Golden.[66]Here
are some remarks from this unpublished, 6th Ci
Defendant argues that if the RHG SEP qualifies
under 26 U.S.C. §408, then it is exempt from garnishment under
Plaintiff argues that the state exemption is preempted under ERISA, and that even if the state exemption was not preempted, it would only apply to the contributions made by Defendant which exceeded a certain amount. Because we agree with Defendant and the district court that the state exemption is preempted under ERISA, we will focus on that argument.
C.
Whether
Based on the magistrate's report and
recommendation, the district court found that under ERISA's
section 1144(a), the
29 U.S.C. §1144(a). In finding that this
provision applied, the court relied upon Mackey v. Lanier Collection Agency
& Serv., 486 U.S. 825, 829 (1988), wherein
the Supreme Court explained that “[a] law 'relates to' an employee benefit
plan, in the normal sense of the phrase, if it has a connection with or
reference to such a plan.” The district
then opined that because Mich. Comp. Laws Ann. §600.6023(1) exempts all §408
individual retirement pension plans from garnishment, while ERISA would allow
garnishment of those funds, the Michigan statute clearly “relates to” or has a
“connection with” the subject ERISA plan. The district court concluded
that, as a result, the
On appeal, Defendant attempts to distinguish
Mackey by claiming that the Georgia statute in question in that case
expressly used the term “ERISA” in describing plans to which the state law
purported to apply, while the Michigan statute in question does not expressly
use the term “ERISA.” Defendant's argument is clearly without merit, where the
Supreme Court has expressly rejected this contention. See Dist. of
Defendant also seeks to interject an argument on appeal that he did not raise in the district court. Of course, we do not entertain such belated arguments on appeal. See White v. Anchor Motor Freight, Inc., 899 F.2d 555, 559 (6th Cir.1990). However, we note that Defendant now seems to argue, based upon his misrepresentation that the district quote misquoted §1144, that §1051(6) excepts Internal Revenue Code §408 [the IRA statute] from ERISA's preemption because ERISA's §1003(a) states that this title applies to benefit plans except as provided in §1051. As with his other allegations of error, Defendant's claim must fail based upon a plain reading of the ERISA statute.
It is true that §1051 states that “this part” shall not apply to certain plans, including §408 plans as we saw with ERISA's anti-alienation provision; however, the “this part” to which the statute refers is part two which encompasses participation and vesting, not preemption. ERISA's preemption is set forth in part five, which does not exclude plans under §408 of the Internal Revenue Code.
Therefore, in summary, the
* * * *
There have recently been a spate of cases holding that plans covering only owners are not covered by Title I, and some stated that the rule applied even if nonowner employees were formerly covered.[67]
Plans without common law employees can be qualified under IRC §401(a), but they are not “employee benefit plans” and thus, are not subject to Title I of ERISA.[68] For this purpose, an individual and his or her spouse are not treated as employees of a business, whether or not incorporated, that is wholly owned by them,[69] and a partner in a partnership and his or her spouse are likewise not treated as employees of the partnership.[70]
(a) General. This section clarifies the definition in section 3(3) of the term “employee benefit plan” for purposes of Title I of the Act and this chapter. It states a general principle which can be applied to a large class of plans to determine whether they constitute employee benefit plans within the meaning of section 3(3) of the Act. Under section 4(a) of the Act, only employee benefit plans within the meaning of section 3(3) are subject to Title I.
(b) Plans without employees. for purposes of Title I of the Act and this chapter, the term “employee benefit plan” shall not include any plan, fund or program, other than an apprenticeship or other training program, under which no employees are participants covered under the plan, as defined in paragraph (d) of this section. for example, a so-called “Keogh” or H. R. 10” plan under which only partners or only a sole proprietor are participants covered under the plan will not be covered under Title I. However, a Keogh plan under which one or more common law employees, in addition to the self-employed individuals are participants covered under the plan, will be covered under Title I. Similarly, partnership buyout agreements described in section 736 of the Internal Revenue Code of 1954 will not be subject to Title I.
(c) Employees. For purposes of this section:
(1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and
(2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.[71]
Such a plan could be qualified under IRC §401(a), and thus tax exempt, without being subject to ERISA. The plan would not have the benefit of the ERISA anti alienation rule, but the IRC anti alienation rule of §401(a)(13) would still require that benefits not be alienable. This exception to Shumate has been recognized in several recent cases.[72]
There should be agreement that a plan that covers only the owner
and the owner’s spouse is not covered by ERISA. But a plan that covers the
owner and the owner’s spouse and a common law employee ought to be covered by
ERISA. Nevertheless, there are now a number of cases holding that in the latter
instance, although the plan is covered by ERISA, the owner and spouse are not.
The cases are hopelessly split. I think that the 5th Ci
The application of this
principle poses some interesting unsolved issues. For example, what if, during
some plan years, the only participants in the plan are either partners or the
sole owner and her husband, but during other plan years there are common law
employees? Does the plan come in and out of ERISA; or once in, does it stay in?
Two bankruptcy case held that a plan can
come in and out of ERISA coverage: in when employees are covered and out when
only the owner is covered.[73] On
the other hand, as the Seventh Ci
Consider that if a plan is subject to IRC §401(a)(13), but not to ERISA §206(d)(1), the plan (in order to be qualified) is required to state that “benefits may not be alienated,” but if state law is not preempted (because Title I is inapplicable), then this required language may be meaningless. Is it possible that if the required language is ineffective as a matter of state law that the plan cannot be qualified? Query whether IRC §401(a)(13), standing alone without the preemptive support of ERISA §206(d)(1), could be construed as “applicable nonbankruptcy law.” (For the reasons previously indicated, this seems doubtful,[76] but the author believes that there are cases presently being litigated on this point.)
A few years back, I came
across a case involving a health plan funded with insurance, which, to my
surprise, stood for the proposition (somewhat dubious to my mind) that even if
the Plan is subject to Title I of ERISA because it covers some common law
employees, Title I (and the preemption doctrine) does not apply to that part of
the plan providing benefits to the sole owner and his dependents.[77]
If this is true, neither a sole proprietor nor a partner in a partnership can
safely rely on the ERISA anti-alienation rule and the preemption provision,
even if the plan covers other common law employees. Later, a federal district
court case arising in the Fifth Ci
To my amazement, there are
now quite a few cases holding that a plan that covers employees is nevertheless
not an ERISA plan with respect to the owner.[79]
On the other hand, the 5th Ci
If a participant in a plan without “employees” (as defined) faces bankruptcy, a real dilemma is posed unless the participant can get the benefit of a state shield law. As a general rule, “pension plans,”[81] in order to be tax qualified, are supposed to provide benefits at retirement. For this reason a distribution to a participant who has not reached normal retirement age[82] or separated from service can disqualify a pension plan.[83] This rule does not apply with near the same severity to profit sharing plans.[84] Therefore, if a participant in a pension plan (as that phrase is used in Treas. Reg. §1.401-1(b)(1)(i)) receives a distribution on account of bankruptcy while still in service and before normal retirement age, the plan could be disqualified. Even in the case of a profit sharing plan or stock bonus plan, where in service distributions may be allowed,[85] a distribution directly to a creditor would still violate IRC §401(a)(13), despite the fact that a distribution to the participant would otherwise be permissible.
For our purposes, a likely candidate for concern would be the sole owner or partner in a plan “without employees” in a state without a shield law. If a trustee in bankruptcy lays claim to the qualified plan interest of such a participant there will be an insurmountable conflict between the qualified plan rules of the Internal Revenue Code and the reach of the trustee’s grasp under the Bankruptcy Code. What happens to the hapless participant and his plan when one division of the government (the judiciary) insists (against the participant’s will) that his plan benefits are to be distributed to his creditors, while another branch (the IRS) insists that to do so is not permitted by the tax laws? Several private letter rulings have held that a distribution to a trustee in bankruptcy of a participant’s interest in a qualified plan will disqualify the plan.[86] A better illustration of the terms (a) procrustean and (b) draconian would be difficult to come by. Do we deserve better from our government? The bankruptcy cases recognize the IRS position,[87] but few if any cases have dealt squarely with the issue as a matter of tax law. A number of bankruptcy cases have indicated that the IRS position would not be sustainable.[88] Unfortunately, these statements are largely dicta.
Whether or not a participant’s or beneficiary’s interest in an IRA or other retirement arrangement is exempt from creditor claims depends on which of several laws applies to it. If the plan is a qualified pension plan subject to Part 2 of Title I of ERISA then the plan will have the protection of the anti alienation rule and will be free of creditor claims.[89] If the Plan is not covered by Title I at all, as would normally be the case with an IRA or SEP, then whether or not the benefits are exempt will depend entirely on state law, and in particular, whether the state has an effective shield law. But if the Plan is covered by Title I of ERISA but not by Part 2 —such as a welfare plan or unfunded nonqualified top hat pension plan or perhaps, an IRA established and supervised by the Employer—the participant gets the worst of both worlds: the participant will not have the benefit of the anti alienation provision and any state law exempting benefits is likely to be preempted.[90]
Labor Reg. §2510.3-2(d) interprets ERISA as not covering IRAs if certain conditions are met, one of which is that “no contributions are made by the employer.” A rollover IRA consists of property that at one time was part of a qualified plan to which contributions were made by the employer. Despite this, it is believed that a rollover IRA is not subject to Title I and is not an employee benefit plan, although it cannot be guaranteed that a court that didn’t understand ERISA would reach the same conclusion, and court’s that don’t understand ERISA are no rarity.
Texas Property Code §§121.051 and 121.055 exempts certain employer sponsored death benefits, including nonqualified salary continuation arrangements, from execution by creditors.
[1]Tenneco, Inc. v. First Virginia Bank (Tidewater), 698 F.2d 688 (4th Cir. 1983); Elise National Bank v. Irving Trust Co., 786 F.2d 466 (2d Cir. 1986).
[2]Patterson v. Shumate, 112 S.Ct. 2242, 119 L.Ed. 519, 504
[3]Compare Goff v.
[4]The Employee Retirement Income Security Act of 1974. ERISA is codified at 29 U.S.C. §1001, et seq., however, all citations to ERISA herein are to the Act itself. As in the case with many other Federal laws, one may cite to the section of the act or the section of the United States Code. This can cause a great deal of confusion if one is not aware of the two systems of citation. USC §1131=ERISA §501, 1132=502, 1133=503, etc.
[5]All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.
[6]ERISA §201(1).
[7]ERISA §201(2). ERISA §3(36).
[8]ERISA §4(b).
[9]ERISA §201(6).
[10]Treas. Reg. §1.401(a)-13(b)(1).
[11]Patterson v. Shumate, 119 L.Ed. 2d 519 at 528.
[12]Patterson v. Shumate, 119 L.Ed. 2d 519 at 528.
[13] Eisenberg v. Houck,
[14]11 USC §541(a).
[15]11 USC §541(a)(1). [Emphasis added.]
[16]11 USC §541(c)(2). [Emphasis added.]
[17]Goff v.
[18]HR Report No. 95-595, p. 369 (1977).
[19]HR Report No. 95-595, p. 176 (1977).
[20]Patterson v. Shumate, 119 L.Ed. 2d 519 at 529.
[21]Patterson v. Shumate, 119 L.Ed. 2d 519 at 529.
[22]Concurring opinion by Justice Scalia, Patterson v. Shumate, 119 L.Ed. 2d 519 at 532.
[23]Patterson v. Shumate, 112 S.Ct. 2242, 119 L.Ed. 519, 504
[24]11 USC §522.
[25]Patterson v. Shumate, 119 L.Ed. 2d 519 at 530.
[26]For a
comprehensive survey of state shield laws see, Golden, “The Quality of Me
[27]26 U.S.C.A. §403(b).
[28]26 U.S.C.A. §1 et seq.
[29]29 U.S.C.A. §1001 et seq.
[30]26 U.S.C.A. §§402(a)(5), 403(a)(4), 403(b)(8), or 408(d)(3).
[31]26 U.S.C.A. §§402(a)(5), 403(a)(4), 403(b)(8) or 408(d)(3).
Section 2 of the 1987 Act provides:
“The exemption prescribed by this Act does not apply to property that is, as of the effective date of this Act, subject to a voluntary bankruptcy proceeding or to valid claims of a holder of a final judgment who has, by levy, garnishment, or other legal process, obtained rights superior to those that otherwise would be held by a trustee in bankruptcy if a bankruptcy petition were then pending against the debtor.”
[32]Youngblood v. FDIC, 29 F.3d 225; 74 AFTR 2d 5910, (5th Cir. 1994).
[33] IRC § 408(e)(2), which provides
“If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year.”
Again, this rule does not apply to a qualified plan, and is confined to IRAs.
[34]Youngblood v. FDIC, 29 F.3d 225; 74 AFTR 2d 5910, (5th Cir. 1994).
[35] See Mackey
v. Lanier Collection Agency & Serv., 486
[36]Goff v.
[37]Heitkamp v. Dyke (In re Dyke), 943 F.2d 1435 (5th Cir. 1991).
[38]
[39]Cf., In Re Schlein,
8 F.3d 745 (11th Cir. 1993) and In Re
Vickers, 954 F.2d 1426 (8th Cir. 1992), cert.
dismissed,
[40]Compare Taft, Robert In re, (1995, DC NY) 184 BR 189 and Henderson In re, (1993, Bktcy Ct MS) 167 BR 67 [SEPs not ERISA plans], with Schlein In re, (1993, CA11) 8 F3d 745, 17 EBC 2020 and Garratt v. Walker 121 F.3d 565 (10th Cir., 1997), 21 EBC 1444, 1997 US App Lexis 19291 [SEP is governed by ERISA].
[41]ERISA §4(b).
[42]DOL Reg. §2510.3-2(d). ERISA §201(6).
[43]In the Matter of Robert L. Branch, U.S.
Court of Appeals, Seventh Ci
[44]ERISA §§3(1) and 3(2)(B); DOL Reg. §§2510.3-1 and 2510.3-2(b).
[45]Cf.,
[46]MacKey v. Lanier Collection Agency and Service,
Inc., 486
[47]ERISA §3(36).
[48]ERISA §4(b).
[49]ERISA §§ 201(2), 301(3), and 401(1).
[50]DOL Reg. §2510.3-2(f).
[51]DOL Reg. §2510.3-2(d).
[52]In Re Schlein,
8 F.3d 745 (11th Cir. 1993). Garratt v.
[53]DOL Reg. §2510.3-2(f). In Re Schlein, 8 F.3d 745 (11th Cir. 1993).
[54]IRC §402(h) and IRS Form 5305, Q&A 4 (Rev 1987).
[55]
[56] Unlike a qualified plan, there is no separate employer trust.
[57]ERISA §201(6) and §301(a)(7).
[58]ERISA §206(d).
[59]ERISA §514(a).
[60]In re Laxson, 102 B.R. 85 (1989); In re Ewell, 104 B.R. 458 (Bkrtcy.M.D.Fla. 1989); In re Martin, 102 B.R. 639 (Bkrtcy.E.D.Tenn. 1989).
[61] See
Golden, “dfasdfsdfasdfasdfadsasdf,”
[62]ERISA §201(6).
[63]ERISA §206(d).
[64]ERISA §514(a).
[65]ERISA §201(6).
[66] Deborah
LAMPKINS, Plaintiff-Appellee, v. Robert H. GOLDEN,
Trustee, Robert H. Golden P.C. Profit Sharing Trust, Defendant, Robert H.
GOLDEN, Defendant-Appellant. (6th Cir. 2002). Slip Copy UNPUBLISHED
DISPOSITION NOTICE: THIS IS AN UNPUBLISHED OPINION. Use FI CTA6 Rule 28 and FI
CTA6 IOP 206 for rules regarding the citation of unpublished opinions. NOTE:
THIS OPINION WILL NOT BE PUBLISHED IN A PRINTED VOLUME. THE DISPOSITION WILL
APPEAR IN A REPORTER TABLE. ,
[67]Meredith v Time Insurance Company, 980
F.2d 352 (5th Cir., 1993), 16 EBC 1296. Re Lane, Jr. (1993, ED NY) 1993 Bankr LEXIS 103. Re Branch, Robert L. (1994, CA7) 1994
[68]DOL Reg.
§2510.3-3(b). Robertson v. Alexander
Grant & Co., 798 F.2d 868 (5th Cir. 1986), cert. den. 479
[69]DOL Reg. §2510.3-3(c)(1). Meredith v Time Insurance Company, 980 F.2d 352 (5th Cir., 1993), 16 EBC 1296.
[70]DOL Reg. §2510.3-3(c)(2).
[71] DOL Reg. §2510.3-3(a)-(c).
[72]In re Witwer, 148 B.R. 930 (Bkrtcy. C.D. Cal. 1992). See also Kwatcher v. Massachusetts Service Employees Pension Fund, 879 F.2d 957 (1st Cir. 1989).
[73]In re Kaplan, 162 B.R. 684 (Bkrtcy. E.D. Pa. 1993). In Re Blais, (1994, BC SD FL) 1994 Bankr Lexis 1427.
[74] Jerome Baker, 114 F3d 636, 21 EBC 1124, affd (1997, CA7) 21 EBC 1124
[75] Patterson v. Shumate, 112 S.Ct. 2242, 119 L.Ed. 519, 504
[76]In re Witwer, 148 B.R. 930, at 936 (Bkrtcy. C.D.Cal. 1992); In re Hall, 151 B.R. 412 (Bkrtcy. W.D.Mich. 1993); In re Lane, 149 B.R. 760 (Bkrtcy. E.D.N.Y. 1993).
[77]Fugarino v.
[78]Harris v. TMG Life Insurance Co., (1996,
SD
[79] Kwatcher v Massachusetts Service Employees Pension Fund (1989, CA1)
879 F2d 957 , 11 EBC 1682. Matinchek v John Alden Life
Ins. Co. (1996, CA3) 93 F3d 96. Meredith
v Time Ins. Co. (1993, CA5) 980 F2d 352 , 16 EBC 1296. Fugarino
v
[80] Vega v Nat. Life Ins. Services, Inc. (1999,
CA5) 1999 WL 680319. See also, Mangan
v Finkelstein (1991, SD NY) 1991 WL 73967, affd
without op (CA2) 956 F2d 1160. Madonia v Blue Cross
& Blue Shield (1993, CA4) 11 F3d 444 , 17 EBC 1769 , cert den (
[81]A
pension plan, for purposes of this rule would include a defined benefit plan
and a money pu
[82]PLR 8430091. The normal retirement age exception probably only applies if the age is reasonable. See Rev. Rul. 78-120, 1978-1 C.B. 117.
[83]Treas. Reg. §1.401-1(b)(i).
[84]Rev. Rul. 68-24 and Rev. Rul. 71-295.
[85]Treas. Reg. §1.401-1(b)(1)(ii).
[86]PLRs
8131020 (
[87]
[88]Regan v. Ross, 691 F.2d 81 (2nd. Cir.
1982) (in dicta); In re Witte, 92 B.R. 218 (Bkrtcy.W.D.Mich.
1988) (in dicta); Clotfelter
v. CIBA-GEIGY Corp. (In re Threewitt), Bkrtcy., 20 B.R. 434 (1982), rev’d on other grounds, D.C.,
24 B.R. 927 (D. Kan. 1982) (in dicta).
[89]Patterson v. Shumate, 12 S.Ct. 2242, 119 L.Ed. 519, 504
[90]MacKey v. Lanier Collection Agency and Service,
Inc., 486