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Dispatches

Bankruptcy Protection for Inherited 401(k)s

A bankruptcy court ruled that an inherited 401(k) cannot be included in the list of assets accessible to creditors during bankruptcy.

by Matthew Bajkowski | August 2021

A bankruptcy court ruled that an inherited 401(k) cannot be included in the list of assets accessible to creditors during bankruptcy.

The court denied that the creditors were entitled to the account’s assets, making a distinction between this case and a U.S. Supreme Court ruling on inherited IRAs. According to the bankruptcy court, an inherited 401(k) is protected under U.S. Employment Retirement Income Security Act (ERISA).

The issue of the case was whether the debtor or the creditors are entitled to the proceeds of a 401(k) account inherited by a non-spouse just before filing for bankruptcy.

The creditors cited the Supreme Court’s 2014 ruling in Clark v. Rameker on inherited IRAs. In that case, Justice Sonia Sotomayor acknowledged the exemption in the bankruptcy code for retirement accounts. She described the reference to ‘retirement funds’ in the code as referring to “sums of money set aside for the day an individual stops working.” Based on this definition, whether funds in an account qualify for protection from creditors depends on the legal characteristics of the account they are held in. Ultimately, the Supreme Court unanimously upheld a lower court ruling that inherited IRAs are not protected from creditors under bankruptcy code.

In the case in hand, a bankruptcy court judge noted the Supreme Court’s point that protection from creditors depends on the type of account at issue. Because the inherited retirement funds are in a 401(k) account, the authoritative precedent is not Clark v. Rameker as cited by the creditors but Patterson v. Shumate, the judge said in his analysis.

U.S. Bankruptcy Judge George Hodge explained in his opinion that the transfer restrictions as a provision of ERISA can exclude inherited retirement funds from bankruptcy law when the account the retirement funds are held in is under the control of the retirement plan administrator at the time of the bankruptcy filing. It is the timing of the fund transfer that determines if the funds are property of the estate entering bankruptcy.

The debtor in this case inherited the funds before declaring bankruptcy but had yet to take any withdrawals as of the date of the Chapter 7 bankruptcy filing.

Source: “Chris D. Dockins and Holly R. Corbell-Dockins.” U.S. Bankruptcy Court Western District of North Carolina, Asheville Division. June 2021.

Discussion

CLAUDE P from GA posted over 4 years ago:

ERISA means The Employee Retirement Income Security Act of 1974 and should normally not be referred to as U.S. Employment Retirement Income Security Act, as is done in this article. A great deal of attention to details is obviously required in analyses of complex federal statutes like ERISA, and the more so when considering its interplay with other equally complex statutes. The words "employee" and "employment" are definitely not the same: that was a bad start. What this article illustrates nonetheless is the complexity of some situations as well as the quirks one can find in our legal system. The decision of one U.S. Bankruptcy Court judge in Asheville, NC, might not have been upheld on appeal and may not necessarily be followed by other bankruptcy judges across the country. But it is still a precedent and might be persuasive. It is a nice illustration of the scholarship displayed by a great many of our judges (who are ably assisted by smart recent law school graduates gaining some experience under their tutelage). One might parenthetically note that the judge might have received considerable assistance from the lawyers who presented the case and did the initial research. (Imagine the legal bill a complex situation like this might trigger!)


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