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The laws regarding ERISA protection in bankruptcy have been in a state of flux throughout the last decade. ERISA is the federal Employee Retirement Income Security Act that was enacted in 1974 in order to provide minimum standards for employee pension and benefits plans in private industry. ERISA protection in bankruptcy means that assets covered in these benefit plans cannot be taken by creditors when a person files for bankruptcy.
Bankruptcy is one option available to people and businesses in order to resolve a hopeless financial situation. The goal of federal bankruptcy laws is to provide fair treatment to creditors and allow consumers and business debtors to start fresh financially. The federal government presides over bankruptcy proceedings unless Congress decides to defer to state law.
In most cases ERISA protection in bankruptcy is offered to people or businesses in the midst of bankruptcy proceedings. If a benefit plan is covered under ERISA, plan assets cannot be collected or taxed by creditors. Even if a plan does not meet the qualifications for ERISA protection in bankruptcy, state law may still allow for plan protection. There are other ways to protect plan assets in the event of bankruptcy, including allocation of assets into a limited liability company, and offshore annuity or a foreign LLC.
In 1992 the Supreme Court made a judgment in a landmark case regarding ERISA protection in bankruptcy. Patterson v. Shumate set a legal precedent which provided ERISA protection in bankruptcy by declaring that a person''s plan assets are to be protected from creditors. Many experts believed that this Supreme Court decision provided the final word on ERISA protection in bankruptcy. However, subsequent legal cases have made exceptions to the 1992 ruling.
State laws also govern ERISA protection in bankruptcy and these laws are still evolving. In approximately half of all US states, state courts have extended ERISA protection in bankruptcy to all forms of tax qualified retirement plans, including Individual Retirement Accounts or IRAs. There are also extenuating circumstances involving state laws that may not extend this ERISA protection in bankruptcy for certain employee benefits plans.
In 2004 another landmark case involving ERISA protection in bankruptcy was pronounced. In the Yates v. Hendon legal case, a “working owner” of a business who had filed for bankruptcy was extended ERISA protection in bankruptcy. This precedent allows a business owner with assets in a benefits plan to qualify as an ERISA plan participant, thereby extending ERISA protection in bankruptcy to some business owners. This judgment has many implications. Business owners now have a stronger incentive to allocate assets into a protected ERISA-covered plan. Business owners may be less inclined to relocate assets to an IRA that may not be protected in bankruptcy. There are exceptions to this 2004 ruling on ERISA protection in bankruptcy. It is important to also note that laws governing ERISA protection in bankruptcy are still changing and evolving.
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