Bankrupty and Pension Plans
Filing for bankruptcy normally does not affect your pension. The law takes the position that you should have enough money to live on once you are unable to work, so creditors do not have an automatic right to confiscate your pension fund assets. However, there are some exceptions to this rule, so it is important to know which parts of your pension are protected and which are subject to creditor actions.
Pension Plan Codes
Every type of pension plan falls under some type of Internal Revenue Code or IRC section which gives information about its qualifications as a protected retirement plan. Funds in certain IRC-designated accounts are automatically excluded from any bankruptcy proceeding, including:
- Educational Individual Retirement Accounts or IRAs under IRC 530(1)(b). However, there are some limitations to this exemption, so be sure to discuss these funds with your attorney.
- Pension and retirement plans qualified under the Employee Retirement Income Security Act of 1974 or ERISA.
- Government retirement plans under IRC 414(d).
- Deferred compensation plans under IRC 567.
- Tax-deferred annuity plans under IRC 403(b).
Even if your pension fund is exempt, you must still document and declare it as part of your bankruptcy filing. In addition, you must choose between federal or state exemptions when you declare a retirement plan exempt. Your attorney can help you choose the right exemption scheme.
Even if you choose state exemptions, you may still claim most pensions and retirement plans as exempt under federal law, including:
- A qualified pension, profit sharing and stock bonus plans under IRC 401, including employee stock ownership plans.
- Qualified annuity plans under IRC 403.
- Individual Retirement Accounts or IRAs under IRC 408, up to a value of $1,245,475 under the federal exemption scheme.
- Roth IRAs under IRC 408A, up to a value of $1,245,475 under the federal exemption scheme.
- Retirement plans for controlled groups such as churches, partnerships, proprietorships and governments, under IRC 414.
- Eligible deferred compensation plans under IRC 457.
- Retirement plans established and maintained by tax-exempt organizations under IRC 501(a).
Plans that May Not Qualify
However, your plan may not qualify for exemption if it falls under one of these categories:
- Employee Stock Purchase Plans or ESPPs.
- Improperly funded plans, even if they are set up under federal guidelines.
- Plans that do not qualify as retirement plans under any identified section of the tax code, such as personal savings accounts.
- An IRA inherited by someone other than a spouse, depending on local law. Check with an attorney for information about this situation.
- Plan funds that have been rolled over or transferred into a new fund without regard to tax code regulations.
If you have questions about your retirement account in bankruptcy, contact the bankruptcy attorneys at Oswalt Law Group in Phoenix today.