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New Bankruptcy Law Affects Retirement Plans and Individual Retirement Accounts

June 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Bankruptcy Act") clarified and extended debtor protection in a number of areas related to retirement plans.  The following is a summary of the Bankruptcy Act provisions relating to retirement plans and individual retirement accounts ("IRAs").

Amounts received by an employer from an employee for payments to an ERISA employee benefit plan or amounts withheld by an employer from the wages of employees for payments or contributions to an ERISA employee benefit plan are exempt from the bankruptcy estate.

  • Funds held in qualified retirement plans are exempt from the bankruptcy estate, even if a state has opted out of the federal bankruptcy exemption.  Note, assets of one person qualified plans would be exempt, even though those plans may not be ERISA plans.
  • A plan's receipt of a favorable determination letter makes the assets of the plan presumed exempt.  Plans without a favorable determination letter can offer proof that the assets of the plan are exempt.
  • Assets rolled over into an IRA from a qualified plan retain their exempt status; there is no cap on the amount exempt.

Assets of IRAs which are not rollovers from qualified plans are exempt up to $1,000,000, "except that such amount may be increased if the interests of justice so require."

Employee loans made to participants from their qualified pension, profit sharing (including 401(k)), or stock bonus plans are not dischargeable in bankruptcy, and wage deductions to repay such loans are not subject to the automatic stay of a bankruptcy filing.

These provisions of the Bankruptcy Act apply to bankruptcy filings made on or after October 17, 2005.  For any questions on how the new Bankruptcy Act may affect your qualified plan or your own personal retirement plan assets, please contact a member of our Employment Practice Group.

This communication is provided as a general informational service to clients and friends of Pedersen & Houpt. It should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. This material may be considered Attorney Advertising in some states. Please note that any prior results discussed in this material do not guarantee similar outcomes.

© 2005 Pedersen & Houpt, all rights reserved.