Rights of the Debtor and Creditor to Retirement Plan Benefits

JurisdictionUnited States,Federal
CitationVol. 20 No. 2 Pg. 199
Publication year1991
20 Colo.Law. 199
Colorado Lawyer

1991, February, Pg. 199. Rights of the Debtor and Creditor to Retirement Plan Benefits


Vol. 20, No. 2, Pg. 199

Rights of the Debtor and Creditor to Retirement Plan Benefits

by Kelly J. Reiman, Robert E. Pennington and Eldon E Silverman

For many, a retirement plan is second in size only to the financial investment in a residence.(fn1) There were over 800,000 employer-sponsored qualified retirement plans in 1984, 49 million employees covered by private pensions in 1985 and $1.3 trillion of assets reserved in 1986 to pay benefits.(fn2) The economic crunch, which started in the mid- to late 1980s and seems to be picking up steam in the 1990s, has caused both debtors and creditors to examine closely their potential rights to benefits held in retirement plans.

This article concentrates on plans which meet the requirements of § 401 of the Internal Revenue Code ("Code"), generally known as qualified plans.(fn3) These plans include profit-sharing plans, pension plans, defined benefit plans, Keoghs (profit-sharing or pension plans maintained by self-employed individuals) and less well-known plans such as target benefit and stock bonus plans. It examines the applicable provisions of the Employee Retirement Income Security Act ("ERISA")(fn4) and the Code, as well as the rights of debtors and creditors when the debtor is and is not in bankruptcy. This article also discusses individual retirement accounts ("IRAs") and simplified employee pensions ("SEPs"). Finally, the application of a "tracing" argument is considered which would protect retirement plan benefits from creditors once the benefits are distributed from a plan.


An understanding of the provisions of the Code and ERISA is important to grasp their effects on debtors and creditors. Qualified plans are those which meet the requirements of Code § 401(a). A plan that meets the requirements of Code § 401(a) will obtain the tax-favored benefits of tax-deductible contributions and tax-deferred earnings. In addition, amounts held for the benefit of recipients are not taxable to them until receipt. Any plan which does not meet these qualifications will be treated (and taxed) as a non-qualified plan.

Code § 401(a)(13) provides that a trust which is part of a qualified plan must prohibit the assignment or alienation of benefits,(fn5) except in three rather limited circumstances.(fn6) Courts generally ascribe the terms "assignment" and "alienation" their common meanings.(fn7)

ERISA also contains an anti-alienation clause [ERISA § 206(d)]. To obtain the benefits of this clause, a plan must, by definition, be a pension plan. ERISA, however, covers more than just pension plans. "Employee benefit plans" under ERISA include both pension plans and welfare plans.(fn8) Welfare plans are not covered by ERISA § 206(d).(fn9)

"Welfare plans" are defined as plans, funds or programs maintained by an employer or employee organization to provide for its participants or their beneficiaries through medical care, sickness, accident, disability, death, unemployment or vacation benefits.(fn10) Examples of welfare plans include accident, life and hospital plans. Coverage is often provided through an insurance policy, typically on a group basis, but insurance is not a requirement. "Pension plans" are defined as plans, funds or programs established or maintained by an employer or employee organization to provide retirement income to employees or that result in the deferral of income by em-

[Please see hardcopy for image]

Kelly J. Reiman, Englewood, is a shareholder with the firm of Engel & Rudman, P.C. Robert E. Pennington is associated with and Eldon E. Silverman is a shareholder in the Denver firm of Elrod, Katz, Preeo, Look, Moison & Silverman, P.C. Robert E. Pennington and Eldon E. Silverman are the attorneys for the plaintiff in the Guidry case mentioned in this article.


ployees for periods extending to the termination of covered employment or beyond.(fn11)

Pension plans (with the exception of certain Keoghs described below) include all the plans in the accompanying table under qualified plans. For a pension plan to be afforded the benefits of ERISA § 206(d), the plan must have employees. Since the definition of "employee" under ERISA excludes individuals and their spouses when the business is wholly owned by either person,(fn12) a pension plan which covers a sole owner/sole participant, including the spouse, does not get the benefit of ERISA's § 206(d) anti-alienation provision.(fn13) However, a Keogh, together with all other qualified plans, should obtain the benefits of the Code § 401(a)(13) anti-alienation provision if it satisfies the requirements of Code § 401(a).

A summary of the effects of the various statutory exemptions, both in and out of bankruptcy, is set forth in the table which accompanies this article. The table considers federal and state law, including references to recent court decisions.


To achieve the policy objectives of ERISA, Congress thought it essential to avoid conflicts with state law in the administration and interpretation of federal laws for employee benefit plans (both pension plans and welfare plans). Congress expressly provided that ERISA shall supersede any and all state laws relating to employee benefit plans, with specific exceptions.(fn14) This concept is referred to as preemption.

Recent Supreme Court Decisions

Prior to 1988, the U.S. Supreme Court decided several key cases which dealt with the issue of whether certain state laws were preempted by ERISA.(fn15) Each of these decisions addressed the question of whether the state laws involved "relate to" an employee benefit plan. The decisions were unanimous in taking a broad and expansive interpretation of ERISA's preemptive reach. Congress intended the words "relate to" in ERISA § 514(a) to be applied broadly.(fn16)

In 1988, the Court decided Mackey v. Lanier Collections Agency & Service, Inc.,(fn17) making two key holdings in its review of a Georgia Supreme Court decision. First, the Court held that ERISA preempted a Georgia statute which specifically prohibited the garnishment of a pension, retirement or employee benefit plan subject to ERISA, since its express reference to ERISA plans was sufficient to bring it within the preemptive reach of federal law.(fn18) Both the Georgia Supreme Court and the U.S. Supreme Court concluded, based on a literal reading of ERISA, that Congress had not intended to bar garnishment of employee welfare benefits, even though employee pension benefits were so protected.(fn19)

Second, Mackey addressed the issue whether ERISA preempted Georgia's general garnishment statute. The Court reasoned that, since ERISA § 502(d) is silent concerning an enforcement mechanism for the collection of such judgments, state law methods must remain undisturbed.(fn20) Furthermore, the majority noted that ERISA bars the assignment or alienation of benefits provided by ERISA pension plans; however, Congress did not enact a similar provision for ERISA welfare benefit plans.(fn21) In summary, ERISA does not preempt Georgia's general garnishment statute; therefore, garnishment of welfare benefits (not pension benefits) under a general statute is permitted by ERISA under the Mackey rationale.

In January 1990, the U.S. Supreme Court decided Guidry v. Sheet Metal Workers National Pension Fund.(fn22) It held in this case that a union, of which Guidry was the chief executive officer, could not reach the assets held for Guidry's benefit in pension plans created by the union, even though Guidry was convicted of embezzling union funds. The Court found it inappropriate to approve any...

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