Are Non-ERISA 403(b) Plans Protected in Bankruptcy?

Bankruptcy Questions About 403(b) Retirement PlansWhat is a 403(b) Plan?

403(b) retirement plans are generally available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code.  The most common participants of the plan include teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians, and ministers

How do I know if it’s protected?

When it comes to protection of retirement accounts, one of the first things we suggest clients do is find out if their plan is ERISA (Employee Retired Income Security Act of 1974) qualified.  We often hear clients ask “what is ERISA?”  Most people probably don’t even know whether their retirement account is ERISA qualified or not.  We’ve previously discussed why it is important your retirement is ERISA qualified in another blog post.  You can often find your ERISA rights in a plan summary provided by your human resources department or plan administrator. However, depending upon the type of retirement plan you have, it may not be ERISA qualified.

“I have confirmed the plan is non-ERISA, now what?”

Generally speaking, if your 403(b) retirement plan is non-ERISA, you are likely limited to protecting it with one option in bankruptcy.  This option is known as your “wild card” exemption.  However, your “wild card” exemption is limited to $5,000 in the state of North Carolina.  It’s rare that a 403(b) retirement plan is non-ERISA so be sure to have documented proof stating it is “non-ERISA”, just as you would for those that are ERISA.  It’s not often we come across a non-ERISA 403(b) retirement plan, so we would suggest being 100% certain it is not a qualified plan before assuming it is not.  Determining whether a plan is ERISA qualified may be the difference of being able to protect your retirement account so we strongly encourage our clients to take the time to make the necessary connections to find out.  If you are interested in filing bankruptcy, but are concerned about your retirement account because you believe it may be non-ERISA, contact a local bankruptcy attorney to find out your options.  A bankruptcy lawyer would then be able to get a better idea of the full situation and provide you with more information for protecting your personal property.

Can I Take Out A 401(k) Loan After Filing Chapter 13 Bankruptcy?

Bankruptcy QuestionsAs long as your 401(k) is ERISA qualified and was exempted (protected) in your bankruptcy petition, you can most likely take a loan against the account while in an active Chapter 13 bankruptcy. However, you MUST get the court’s permission!

When you are filing for bankruptcy, one of the top concerns is to protect your assets.  There are federal and state exemptions available to protect any equity or funds in your possessions.  A 401(k) plan is a common account that should be protected from the bankruptcy creditors.  Through the case of Patterson vs. Shumate, there is no limit to the amount that may be protected under this exemption as long as the plan or account is ERISA qualified (Employee Retirement Income Security Act of 1974).  You will need to provide documentation proving the plan is ERISA qualified, such as a copy of the plan summary that includes the ERISA statement.

To obtain a loan from your 401(k) while in a Chapter 13 bankruptcy you must get the court’s permission. Your bankruptcy lawyer can do so by filing a Motion to Incur Debt. You would have to appear in front of the judge to get the judge’s permission. The judge will usually grant permission to pull from your 401(k) loan if you can provide a good reason for why you need the money. This, typically, needs to be something that is a necessity, not just a “want”. An example of this may be if you need money to purchase a vehicle after another one has broken down or if you need money to pay medical expenses that were incurred after the filing of the bankruptcy. Discuss this with your bankruptcy lawyer before starting the loan withdrawal process.

Will I Lose My Retirement If I File for Bankruptcy?

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Generally speaking, no. However, there are always exceptions.

Most retirement plans are ERISA qualified, which stands for Employee Retirement Income Security Act of 1974.  This law was enacted to protect your retirement accounts from risky investments by your employer or plan administrator.  If the plan is ERISA qualified, then your bankruptcy Trustee cannot seize your retirement money to pay your creditors.  We recommend that you ask your employer for documentation showing that the plan is ERISA qualified.  This can usually be found in the plan summary in the packet of information that your retirement administrator will send. If you do not have the plan summary you will need to request something from your employer, however, this can take several weeks to receive so ask immediately.

Happy Retired Couple

The most common retirement plan is a 401k, which is a type of deferred compensation plan.  Normally, this is through your employer and can be matched by the employer.  You decide what set amount that you will contribute per month, such as $100 or 5% or your salary if you choose.  The majority of 401k retirement plans are through your employer, which are automatically ERISA qualified.  There is a federal bankruptcy exemption that is used to protect 100% of your money through the 401K.

Another common type of retirement plan is an Individual Retirement Plan (IRA), which is a savings or investment account for the employee.  Contributions are made pre-tax and are not taxed until they are withdrawn.  However, there are several IRA’s that are not considered ERISA qualified which include:

Plans in which your employer or employer organization does not contribute money to the plan

Voluntary Plans for yourself that is not connected to employment (such as opening one at a bank)

Deferred Compensation Plans

Again, generally the Trustee will not be able to take money from your retirement accounts.  An example of when a Trustee may have the ability to “attack” your retirement is if you have a 401K through your employer and right before bankruptcy, you make a large contribution to “hide” some of your money.  This is considered fraud, in which the court can allow creditors to attach to your funds in order to get paid, even though the plan is ERISA qualified.

Although your retirement plans will almost always be protected, make sure you consult your bankruptcy attorney about your specific situation.

What is an ERISA Qualified Plan and Why Do I Need it for My Bankruptcy Case?

Bankruptcy Questions About Retirement PlansIf you have recently filed a Chapter 7 bankruptcy or a Chapter 13 bankruptcy it is important that you ensure your retirement plans are ERISA qualified.  The bankruptcy trustee, who represents your creditors, will probably require that you present him or her with evidence at the creditor’s meeting, showing that your retirement plan with your employer (if you have a retirement plan) is a ERISA qualified retirement plan. ERISA is the abbreviation for Employee Retirement Income Security Act of 1974. This law was enacted to protect your retirement accounts from risky speculation by your employer or plan administrator so that when you retire, your money will be in the account and not lost by risky investments.

Most employer retirement plans are ERISA qualified plans. If the plan is ERISA qualified, or an IRA, the bankruptcy trustee cannot normally seize your retirement money to pay off your creditors. However, a very small percentage of retirement plans are not ERISA qualified and/or are not legitimate IRAs, and therefore are not protected. In this event, if you file bankruptcy, the trustee can take your retirement money. Don’t panic, if you work for a legitimate company, it is very likely that the plan is ERISA qualified or protected from your creditors.

Before you sign the official bankruptcy petition (not the worksheets), it is your responsibility to contact your employer or former employer with which you have the 401K, IRA, retirement plan, and obtain verification from the employer that the plan is ERISA qualified. We suggest you contact the employers personnel/payroll or human resources department for this information. They may refer you to the plan administrator, such as Fidelity or Charles Schwab, etc. for the information. It may take several weeks for them to send you this information, so don’t wait until a few days before the creditors meeting to request this information. Start working on it now!

Usually, you will need for your employer to send you documentation, such as a plan summary. This is the booklet you probably received when you originally signed up for the plan, or a letter on company letterhead from the plan administrator, stating that the plan is ERISA qualified and the dollar amount in the plan.

Do not bring only your quarterly statement your employer sends you. This is unacceptable to the trustee. You may bring the quarterly statement, but you must have the statement, usually called a plan summary, stating the plan is ERISA qualified.

You must have this documentation with you at the creditor’s meeting which will be scheduled approximately 4-6 weeks after you file bankruptcy. If you do not have the documentation, the trustee will usually allow you an additional 10 days to provide this to him/her. If you do not provide this documentation to the Trustee, the Trustee could ask the Judge permission to seize your retirement account and pay your creditors with this money.

In conclusion, make sure your retirement account is ERISA qualified before you file the bankruptcy. If you have any questions contact us today.