RETIREMENT FUNDS THAT HAVE RECEIVED A FAVORABLE DETERMINATION UNDER THE INTERNAL REVENUE CODE CAN BE EXEMPTED IN THE BANKRUPTCY CASE
Retirement funds are protected to the extenxt that those funds are in an account that has received a favorable determination under the Internal Revenue Code. Such determination is that the funds are basically exempt from taxation. Retirement funds are either excluded from the bankruptcy estate or can be exempted under most state exemptions or the federal exemptions. The types of retirement funds that are referrred to under the Internal Revenue Code are as follows:
IRC $401-a qualified (ie. tax-deferred) pension, profitsharing and stock bonus plan created under a trust established by an employer for the exclusive benefit of employees or beneficiaries.
IRC $403-qualified (ie. tax-deferred) annunity plans that are established by an employer for an employee under IRC $404(a)(2) or $501(c)(3).
IRC $408-individual retirement accounts (IRA), which is "a trust created or organized for the exclusive benefit of an individual or his beneficiaries."
IRC $408A-a Roth IRA.
IRS $414-other retirement plans for controlled groups of employees, including predecessor employers, partnerships or proprietorships, governments and churches.
IRS $457-eligible deferred compensation plans established and maintained by eligible employers.
IRS $501(a)-retirement plans established and maintained by defined tax-exempt organizations.
RETIREMENT FUNDS THAT HAVE NOT RECEIVED A FAVORABLE DETERMINATION UNDER THE INTERNAL REVENUE CODE CAN POSSIBLY STILL BE EXEMPTED IN THE BANKRUPTCY CASE
There are particular instances where the funds in a retirement fund have not received a favorable determination under the Internal Revenue Code, but those funds can still be exempted and protected if the debtor can show:
1) no prior or unfavorable determination has been made by a court or the Internal Revenue Service; and
2) the retirement fund in question is in substantial compliance with requirments of the Internal Revenue Code; or
3) the retirement fund in question is not in substantial compliance with the requirments of the Internal Revenue Code and the debtor is not responsible or the cause of the failure of the Internal Revenue Code to be in compliance.
DIRECT AND INDIRECT TRANSFERS FROM ONE ACCOUNT TO ANOTHER CAN BE EXEMPTED
As long as the retirement fund or account is a qualified account under any of the Internal Revenue Code section's referenced above and is exempt from taxation, then any direct transfer of funds from one account to another shall continue its' protected status and be exempt under the Bankruptcy Code. For instance, any distribution that is in the nature of a rollover distribution and such distribution is deposited into the new fund or account within 60 days after the direct transfer of the funds continue to be exempt. It is necessary that both funds be qualified funds when making a transfer. Otherwords, the funds must be transfered from a fund or account that is qualifed into a fund or account that is also qualified, without the funds ever coming into contact with the debtor. However, indirect transfers or rollovers are permitted as well. An example would be where the debtor closed out one qualified account and received those funds, then within 60 days opened up a new qualified account and deposited the funds.
EVEN IF AN ACCOUNT IS NOT TREATED UNDER THE INTERNAL REVENUE CODE, IT MAY STILL BE EXEMPT
A troubling situation that arises on occasion is where a person has a retirement account that is not treated under the Internal Revenue Code within the context of this particular exemption. Many federal employees have a retirement vehicle known as a thrift savings plan, which is not treated under the Internal Revenue Code, but rather Title 5 of the United States Code. The question then becomes whether such funds are exempt under the Bankruptcy Code? The bankruptcy courts have treated such funds as exempt. Such plans are exempt from taxation under a different section of the Internal Revenue Code, so the courts have concluded that such plans were intended to be exempt in bankruptcy as well.
RETIREMENT FUNDS ARE ALWAYS PROTECTED REGARDLESS OF THE CHOICE OF EXEMPTION
In Pennsylvania, retirement funds are exempt under either the state exemptions or the federal exemptions. However, if a person was ever faced with a situation where their particular state did not allow them to take the federal exemptions and the particular state exemptions did not allow for the exemption of retirement funds, then those funds can still be exempted under the Bankruptcy Code, as a different section of the Bankruptcy Code was created to address such a situation.
INHERITED IRA'S ARE NOT CONSIDERED RETIREMENT FUNDS FOR PURPOSES OF EXEMPTIONS
Sometimes a situation that person may be faced with prior to filing bankruptcy is that they inherited an IRA. The question is whether an inherited IRA can be exempted? Very few courts have addressed this issue, but those courts have concluded that such an IRA is not exempt or protected from creditors. An inherited IRA is not viewed as your typical retirement, and is not exempt from taxation under the Internal Revenue Code.
RETIREMENT LOANS SURVIVE ANY BANKRUPTCY FILING
One of the key benefits of a bankruptcy is the imposition of the automatic stay. The automatic stay is what prevents a creditor from being able to collect against you. In order to proceed with any collection activities against the debtor, it is first necessary to obtain relief from stay or permission from the court. However, the Bankruptcy Code provides certain exceptions to the automatic stay whereby relief from stay is automatically granted and therefore it is not necessary to obtain the court's permission. One of the exceptions to the automatic stay is the withholding of income from the debtor's wages that is used solely for the repayment of a loan that was taken out against a retirement plan treated under the Internal Revenue Code or a thrift savings plan treated under Title 5 of the United States Code. The Bankruptcy Code provides for the exception from the automatic stay for the collection of payments toward any loans taken out from a pension, profit-sharing, stock bonus, or other qualified plan under the Internal Revenue Code, likewise such loans have been granted an exception to discharge and survive any bankruptcy. Otherwords, the debtor will continue to remain responsible for those loans.
EXEMPTING THE DEBTOR'S RIGHT TO RECEIVE PAYMENT UNDER A RETIREMENT PLAN
Once a person finally retires and starts receiving payments from their retirement account, it is then necessary to exempt those funds under a different section of the Bankruptcy Code. Section 522(d)(10)(E) of the Bankruptcy Code may used by debtors only in those states that have not opted out of the federal bankruptcy exemptions. Pennsylvania is one of those states that has not opted out and you may use this exemption. In order to qualify under this exemption, the retirement plan must be a stock bonus, pension, profitsharing, annuity or similar plan or contract. Also, such payments must be on account of illness, disability, death, age or length of service to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. However, the plan must not have been established by or under the auspices of an insider that employed the debtor at the time the debtor's rights under such plan arose and such payments are on account of age or length of service and such plan does not qualify under $401(a), $403(a), $403(b) or $408 of the Internal Revenue Code, which is mentioned above. It should be pointed out that a plan does not have to be tax-qualified in order for the funds to be exempt under Section 522(d)(10)(E). Tax-qualification is only required if the plan was established by or under the auspices of an insider that employed the debtor and payments are on account of age or length of service. For purposes of the Bankruptcy Code, insiders include directors and officers of corporations, general partners of partnerships and persons in control of plan sponsors. In essence, if the debtor is not an insider, the plan may be exempted uner $522 (d)(10)(E) without tax-qualification, but if the debtor is an insider then tax-qualification is required in order to use the exemption.
EXPERIENCE COUNTS WHEN SELECTING AN ATTORNEY
If you are uncertain as to whether your retirement accounts would be protected in your bankruptcy or simply have any other questions, then call Pittsburgh Bankruptcy Attorney Rodney Shepherd today. You may contact him by calling 412-471-9670 or by completing our contact information form. A free consultation will be scheduled at your convenience.