by Richard A. Naegele

In addition to permitting contributions of pre-tax dollars into tax-exempt trusts, employer- sponsored retirement plans and individual retirement accounts also provide potential protection of assets from creditor claims.

Subject to certain exceptions such as Qualified Domestic Relations Orders (permitting the division of assets in divorce and attachment for child support) and federal tax levies, tax-qualified retirement plans are generally protected from creditor claims by the anti-alienation provisions of ERISA (the Employee Retirement Income Security Act) and the Internal Revenue Code.

In the 1992 case of Patterson v. Shumate, the United States Supreme Court held that ERISA protects an individual's interest in a tax-qualified retirement plan from attachment in bankruptcy.

Since Patterson, U.S. bankruptcy courts have ruled that creditors may attach assets in "owner only" retirement plans. The bankruptcy courts have held that a retirement plan that benefits only the owner of a business is not "ERISA-qualified". ERISA is intended to benefit employees, the courts have noted, while a sole owner of a business is an "employer" rather than an "employee".

However, a plan which covers one or more non-owner employees should be subject to ERISA creditor protection. Therefore, practitioners have recommended that an owner/plan participant could assure that his assets under a retirement plan were protected from creditor claims if at least one non-owner was also covered under the plan.

The U.S. Sixth Circuit Court of Appeals recently held that ERISA creditor protection may not be available for a sole-owner. In the case known as in re: Yates, the sole shareholder of a corporation and one of four participants in the corporation's retirement plan, repaid a $50,000 loan to the plan three weeks prior to bankruptcy.

Holding that a sole shareholder is not an "employee" for purposes of ERISA, the Sixth Circuit held that the sole owner could not assert ERISA protection and set aside the loan repayment thereby making the money available for creditors.

The attorneys for the sole shareholder argued that the position of the Sixth Circuit is contrary to decisions of eight other circuits. Nonetheless, the bad facts and perceived overreaching of the owner might have influenced the Court to reach its conclusion. Unfortunately, the decision calls into question ERISA creditor protection as applied to sole shareholders and sole proprietors in the Sixth Circuit states of Ohio, Michigan, Kentucky and Tennessee.

IRAs simplified employee pension or, SEP-IRAs, SIMPLE-IRAs (savings incentive match plans for employees), government plans and most church plans are not covered under the anti-alienation provisions of ERISA or the Internal Revenue Code. Therefore, a participant's benefits under such plans are subject to creditor claims unless protected under state law. In March, 1999, the Ohio Revised Code was amended to exempt IRAs and Roth IRAs from creditor claims. Although SEP-IRAs and SIMPLE-IRAs are types of IRAs, they are not protected under Ohio law. Amounts rolled over from a SEP or SIMPLE to a rollover IRA are, however, protected from creditor claims.

The protection offered to IRAs under Ohio law was made somewhat unclear in 2002, as a result of a decision by the U.S. Sixth Circuit Court of Appeals in the case of Lampkins v. Golden. In Lampkins, the Sixth Circuit held that a Michigan statute exempting SEPs and IRAs from creditor claims was preempted by ERISA and, therefore, an SEP was subject to attachment. Since the Lampkins' decision did not state specifically that it applied only to SEPs, practitioners in the Sixth Circuit are concerned that Lampkins could result in IRAs in Ohio being subject to creditor claims.

Fortunately, the U.S. Bankruptcy Court for the Northern District of Ohio recently decided that the Lampkins decision has not caused IRAs in Ohio to be subject to claims in bankruptcy. Noting that a SEP is an employer sponsored plan while a regular IRA is not. The Bankruptcy Court held that the Ohio Revised Code provision exempting IRAs from a debtor's bankruptcy estate is not pre-empted by ERISA.

In summary, an individual's benefits under a tax-qualified retirement plan generally are protected from attachment by creditors and exempt from bankruptcy claims. IRAs, although not protected under Federal law, generally are protected in Ohio. SEP IRAs and SIMPLE IRAs are not.

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