If youre in the unfortunate position of bankruptcy or have just closed your business, you probably thought the pension plan money you rolled over into an IRA was safe from creditors. And you would have been wrong.
At least until last year, that is, when the state legislature passed House Bill 1048.
Federal law under ERISA (Employee Retirement Income Security Act of 1974) has long protected assets in a qualified employer-sponsored retirement plan, whether pension, profit sharing or 401(k) plan, from the reach of creditors of employees who are plan participants. IRAs, however, are not protected by federal law, which means employees who terminate their employment and roll over their money into an IRA lose their protection from creditors. Thats where state law comes in.
In Pennsylvania, according to Gary Gunnett, an attorney with Pittsburgh law firm Houston Harbaugh, state law protected up to $15,000 in IRA-rollover assets, leaving anything over that amount unprotected from creditors. As state law noted. Amounts contributed by the debtor in excess of $15,000 in a one-year period are excepted.
Then in 1997, in the case of In re Barshak, the Third Circuit Court held that a rollover from a qualified employer plan to an IRA is a contribution within the meaning of the Pennsylvania statute, which reaffirmed the $15,000 protection limit.
Gunnett, in a letter to State Sen. Tim Murphy in December of 1997, wrote, While opinions may differ as to whether creditors should be able to reach retirement plan assets, most would agree that there is no reason for the inconsistency between qualified employer plans and IRAs, particularly where, for business and tax reasons, an individual has no choice but to effect an IRA rollover. This inconsistency is clearly contrary to the policies behind both ERISA and 42 Pa. C.S.A. S8124.
Gunnett said in the letter that the law as it stood was particularly of concern to physicians who sell their practices to hospitals and other larger groups and have to terminate their retirement plans.
To avoid current taxation, a physician often has no choice but to roll his qualified plan account into an IRA, he wrote, thereby exposing it to potential creditors under the Barshak decision.
In early 1998, the state finally put the issue to rest by changing the law itself and protecting IRA rollovers at the same level as qualified employer-sponsored retirement plans.
This legislation was important because, for a lot of small business owners, their major asset is their retirement plan, Gunnett says of the new law. I think the Pennsylvania legislature should be commended for recognizing the problem and correcting the legislation.