The federal protections of ERISA protect retirement assets from most creditors under the anti-alienation provision, section 206(d)(1). However, not all retirement plan contributions are protected from all creditors of fraudulent transfers to avoid creditors are generally not protected. Moreover, a qualified domestic relations order assigning a portion of that benefit to someone other than the plan participant is a means of avoiding non-compliance with ERISA's anti-alienation provision.
For instance, qualified ERISA plans are protected against most creditors. This includes employer-established 401(k) plans, pension plans, profit-sharing plans, as well as health and life insurance plans.
The anti-alienation provision of ERISA requires “each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” This provision protects funds and contributions made to qualified plans from creditors' reach. With these protections, the plan participant is better able to provide security for their financial future with the funds set aside for retirement. However, these protections are not absolute. Some creditors can access normally protected ERISA funds. This includes federal IRS tax judgments and domestic support orders.
A qualified domestic relations order (QDRO) is “a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.” Under a QDRO, payments can be made from a retirement plan to a spouse or former spouse as if they were a plan participant without running afoul of the anti-alienation provision of ERISA.
Participant accounts and benefits under ERISA-protected plans may also be subject to attachment by federal tax liens. In some cases, federal tax liens may immediately attach to pension benefits. In other cases, the IRS may have to wait until the participant takes distributions from their plan. ERISA plans are generally protected from attachment by state tax liens.
However, other creditors may be able to access contributions made to ERISA benefit plans if they were made to perpetrate fraud. Fraudulent transfers, or avoidable transactions, are contributions of assets that were available to creditors.
Courts have cited the exceptions to the anti-alienation provisions to show that contributions to protected plans are not absolutely protected. In fact, there may be an implied exception to anti-alienation in cases of fraud. At least one court has found that “[t]he application of state laws voiding conveyances made in defraud of creditors does not impermissibly conflict with the identified purposes of the anti-alienation provision in ERISA.” Planned Marketing v. Coats & Clark, 71 N.Y.2d 442 (1988).
There may still be a high bar for creditors to show that a transfer was made to defraud creditors. Creditors may have to show that the plan participant made the contributions with the specific intent to avoid creditors. It may be difficult to show regular transfers to a pension plan were intended to defraud. Even late and large contributions may be protected under ERISA's strong preemption and anti-alienation protections.
If you have any questions about the creditor protections of qualified ERISA accounts, contact your ERISA attorneys. Butterfield Schechter LLP is San Diego County's largest firm focusing its law practice on employee benefits and ERISA matters. Our firm can help you establish a qualified retirement plan, maintain compliance with ERISA's requirements, and represent you in ERISA litigation. Contact our office today with any questions on how we can help you and your business succeed.