Americans have trillions invested in qualified retirement plans (QRPs) and individual retirement accounts (IRAs). Knowing what protections these assets have from creditors is essential to good estate planning.

Different sets of rules govern QRPs and IRAs, including whether such assets are exempt in whole or in part from creditors' claims.

The Employee Retirement Income Security Act of 1974 (ERISA)1 controls QRPs, preempting state law.2 But ERISA does not apply to all employee plans — only those defined in ERISA Section 3(1). Even then, not all of ERISA's provisions apply to all plans governed by the act.3

ERISA is divided into titles, and while some rules cut across several titles, others apply only to a specific title. For example, the anti-alienation provision contained in ERISA Section 206(d)(1),4 is at the very heart of the existence of creditor protection. It says, “Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.”5 The term “pension plan” is defined by ERISA Section 3, and that definition begins with the limitation: “[f]or purposes of this title…”6

The other relevant facet of ERISA is the preemption provision in Section 514(a): “The provisions of this title [Title I] and Title IV shall supercede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) [29 U.S.C. Section 1003(a)] and not exempt under section 4(b) [29 U.S.C. Section 1003(b)].”7

In contrast, IRAs are a creation of the Internal Revenue Code.8 No overarching federal structure preempts state law, even though some portions of the Code pertaining to QRPs are specifically made applicable to IRAs.9 So when are QRPs and IRAs protected? And, in the case of IRAs, which state's law applies?


In a non-bankruptcy context, the creditor protection provided to participants in qualified plans is based upon ERISA Section 206(d)(1), which contains an “anti-alienation” provision clearly prohibiting a creditor from reaching the assets in a QRP. The Supreme Court in its 1990 decision Guidry v. Sheet Metal Workers Nat'l Pension Fund10 found that the prohibition against alienation carried out a strong Congressional purpose to protect the stream of income for pensioners and, if there were to be exceptions, it would be up to Congress to make them.

Most of the law interpreting the creditor protection available arose in the bankruptcy arena, and centered around two different provisions of the Bankruptcy Act, one involving exemptions granted under state law,11 the other involving exclusions from the bankruptcy estate.12 The general rule in bankruptcy is: The bankruptcy estate includes all of the property of the bankrupt — unless it is excluded from the estate under the Bankruptcy Act13 — but certain included property may still be exempt from claims of creditors. While both exemptions and exclusions result in the inability of the trustee in bankruptcy to reach the assets of the plan, there are important distinctions.

State law exemptions apply in bankruptcy, or a debtor may elect exemptions provided by federal law.14 Many states enacted shield laws to protect QRPs (and IRAs) when bankruptcy courts began allowing creditors to reach those benefits. With respect to employee benefits, the debtor may choose either (not both) state or federal exemptions, but the federal exemptions are extremely limited.15 On the other hand, exclusions apply to all bankruptcy, although (adding to the confusion) some depend upon state law rights.

During the 1980s, bankruptcy courts and some appellate courts routinely found that the assets in qualified plans were included in the bankruptcy estate16 (without any regard to how those assets were to be captured from the plan sponsor) and that ERISA preempted state shield laws. Later rulings, in cases where state exemptions had been elected, found the state exemptions applied and ERISA Section 514(a) did not preempt state law. Still later decisions held that ERISA's anti-alienation provision restricting transfer was “applicable nonbankruptcy law,”17 thus causing the assets to be excluded from the bankruptcy.

The Supreme Court apparently settled this argument in 1992. In Patterson v. Shumate, a unanimous court stated in no uncertain terms that the anti-alienation provisions of ERISA are applicable and interests in QRPs are excluded from the bankrupt's estate. Despite the Supreme Court's clear mandate, the lower courts have resisted the application of this doctrine, either by distinguishing Patterson18 or by refusing to extend its holding.19

Thus, while the Supreme Court has sought to protect assets in a QRP, lower courts (particularly in bankruptcy cases) have been creative in carving out ways to subject assets to creditors' claims.


There is no federally imposed anti-alienation provision applicable to IRAs, so any exemption depends upon state law. As IRAs are considered self-settled trusts under state law, a spendthrift clause in an IRA would be ineffective. State law must grant a specific exemption. There is a clear dichotomy between essentially pro-debtor and pro-creditor states. Most states, including Texas,20 provide a specific statutory exemption from creditor's claims for IRAs, so long as the amount of the contribution was deductible and it was not a fraudulent transfer.21 These statutes also exempt the assets in a rollover IRA. Other states, such as Virginia, offer only a limited exemption.22 To my knowledge, every state provides some form of exemption, but unless all possible jurisdictions offer unlimited protection, the problem persists.

Other than conflicts-of-laws, the seminal question in the IRA area is whether the IRA is qualified (because state exemption statutes require that the IRA meet the qualifications of Internal Revenue Code Section 408). There also are new issues surrounding whether a Simplified Employee Pension-Individual Retirement Account under IRC Section 408(k) is subject to ERISA or not.23 The qualification determination has two components: whether the IRA itself is qualified and whether the rollover contribution to an IRA has come from a plan that is qualified. An example of the latter can be found in a 1994 case out of the U.S. Court of Appeals for the Fifth Circuit, In re Youngblood.24 The creditor argued the plan that was rolled over to the IRA was disqualified by engaging in prohibited transactions, and because the plan was not exempt, the IRA could not be qualified. The Fifth Circuit held that the Internal Revenue Service has the authority to determine qualification, and its assessment that the termination of the plan preceding the rollover was a qualified transaction precluded the bankruptcy court from considering the issue.

A second issue concerns whether the IRA itself is qualified. IRC Section 408(e)(2) provides that if the participant or the beneficiary engages in a transaction prohibited by IRC Section 4975 (the rules regarding prohibited transactions and self-dealing), the IRA “ceases to be an individual retirement account.” No action by either the IRS or the Department of Labor is required; disqualification happens as a matter of law. Thus, if a creditor can prove there was a prohibited transaction, the statutory exemption should not apply. This clearly puts the qualification of an IRA within the province of a bankruptcy court to determine whether state exemption statutes will shelter the IRA.

A most intriguing area, and one in which there are few if any answers, concerns the application of conflicts-of-law rules to IRA exemption statutes. For example, what happens if a participant is in one state, and the plan he adopts contains a choice-of-law provision applying the law of another jurisdiction and is enforceable there under its terms, while the plan's custodian and assets are located in another state? Assume further that neither the state specified by the contract nor the domicile of the plan custodian has a statute fully exempting IRAs from creditors' claims. A creditor sues, and obtains a judgment. When the creditor seeks to enforce the judgment, which state's law applies?

There is an amazing paucity of law answering such questions. One of the few pertinent cases, Bergman v. Bergman, came out of El Paso, Texas in 1994.25 The facts in this case are somewhat complex. The parties were divorced in Connecticut. The separation agreement they entered into there provided that Connecticut law would govern all aspects of the agreement including, “the construction or execution of the same wherever and whenever undertaken.” After the divorce, the husband, an employee of American Airlines (which is headquartered in Dallas, Texas), moved to New Mexico and the wife moved to Florida. The husband breached his agreement, and the wife obtained a judgment in a Connecticut court. She sought to enforce the judgment in El Paso, Texas, and the court served the husband while he was in El Paso. The wife sought an order directing the husband to turn over a portion of his retirement benefits.

The El Paso court adopted the position outlined in the Restatement (Second) of the Law of Conflicts, Section 132 (1971), which states: “The local law of the forum determines what property of the debtor which is within the state is exempt from execution unless another state, by reason of such circumstances as the domicil (sic) of the creditor and the debtor within its territory, has the dominant interest in the question of exemption. In that event, the local law of the other state will be applied.” In applying that doctrine, the court determined that Texas had the dominant interest and therefore Texas law applied, because the property of the debtor was located in Texas.26

Why don't the conflicts rules governing contracts apply?27 The answer, simply, is that the situs of the contract determines its enforceability and damages there-under, but does not govern enforcement of the remedy. Exemptions are left to conflicts rules governing enforcement.28

If a national bank is the trustee or custodian of the IRA, the controlling law by contract is probably the law of the state where the bank is headquartered. But the account is often administered in another state, which in most cases would be the state of residence of the IRA owner. It would seem then that the law of the state where the owner resided and where the property was being administered would control whether creditors could reach the IRA's assets. Does it make a difference if the assets are held in the headquarters state, or should they be deemed constructively located where the IRA is “administered”? With a national provider, does the fact that the assets are located in the home state of such custodian require that the exemption statutes of those states be applied nationally? A logical extension of Bergman would apply the law of the state in which the assets are located if the creditor and debtor are domiciled in different states. However, the domicile of the custodian usually would not appear to have the dominant interest in the enforceability of the judgment.

Despite judicial and statutory attempts to create certainty, there are still issues to be pursued by resourceful creditors. Although Patterson would seem to ensure the exempt status of qualified plan benefits, lower courts have sought to distinguish it and have, in many cases, refused to extend its doctrine. And which state law applies to IRAs is still an absolutely open question.


  1. All references to “ERISA” and “ERISA sections” are to sections of the Employee Retirement Income Security Act of 1974.
  2. ERISA Section 514 (a).
  3. Title I does not apply to, among other things, government plans and church plans. ERISA Section 4. 29 U.S.C. Section 1003.
  4. 29 U.S.C. Section 1056(d)(1).
  5. See also Internal Revenue Code Section 401(a)(13).
  6. Title I, “Protection of Employee Benefit Rights”. 29 U.S.C., Chapter 18, Subchapter I.
  7. The Section 4(b) exemptions do not apply to the creditor rights issue.
  8. IRC Section 408.
  9. For example, IRC Section 408(a)(6) makes the minimum required distribution rules of IRC Section 401(a)(9) applicable to IRAs.
  10. 493 U.S. 365, 110 S. Ct. 680 (1990).
  11. 11 U.S.C. Section 522(b)
  12. 11 U.S.C. Section 541(c)(2) excludes from the bankruptcy estate property of the debtor that is subject to a restriction on transfer under “applicable nonbankruptcy law.” This has been interpreted to apply to valid spendthrift trusts that qualify under state or federal law.
  13. 11 U.S.C. Section 541(a)(1)
  14. 11 U.S.C. Section 522(b). To the extent that state law exemptions are chosen, the federal exemptions in 11 U.S.C. Section 522(d) may not be used.
  15. 11 U.S.C. Section 522(d)(10)(E) provides an exemption for QRP benefits limited to “the extent reasonably necessary for the support of the debtor and any dependent of the debtor.”
  16. For a discussion of the development of the law in this area, see Alvin J. Golden, ”Is There Light at the End of the Tunnel: Onward Thru the Fog of Qualified Plans and IRAs,” State Bar of Texas Advanced Estate Planning Strategies Course, Chapter B (1994).
  17. Circuit court of appeals cases are discussed in footnote one of Patterson v. Shumate, 504 U.S. at 753, 755 (1992).
  18. Two examples are In re Bell & Beckwith, 5 F.3d 150 (6th Cir. 1993), and In re Lowenschuss, 171 F. 3d 673 (9th Cir. 1999).
  19. For example, in In re Taylor, 212 F.3d 395 (8th Cir. 2000), the court held that the plan assets, while not available to creditors, could be used in calculating the amount of payments to be made by the debtor in a Chapter 13 Wage Earner's Plan.
  20. Texas Property Code Section 42.0021.
  21. Massachusetts, for example, excludes from the exemption any contribution to an IRA during the five-year period preceding the individual's declaration of bankruptcy or entry of judgment in excess of 7 percent of the total income of such individual for such period. Mass. Gen Laws, ch. 235, Section 34A.
  22. Virginia Code Section 34-34. (table of benefits); California Code of Civil Procedure §704.115(e) (adopting federal exemption under Bankruptcy Code Section 522(d)(10(E) based upon need).
  23. For a discussion of this issue, see Golden, “Piercing Shield Laws to Garnish SEP-IRAs,” Trusts & Estates, August 2002, p. 51.
  24. 29 F.3d 225 (5th Cir., 1994).
  25. 888 S.W.2d 580 (Tex. Civ. App.- El Paso, 1994)
  26. It is inconceivable that no one raised the issue of ERISA preemption, since the benefits in question were in a qualified plan and not in an IRA. Clearly, ERISA would have protected these benefits and the conflicts of law analysis would have been unnecessary. But see In re Pederson, 105 B.R. 622, 624 (1989), applying the exception (Colorado law applied where the debtors lived in Colorado and Colorado was the forum state, even though the annuity in question was entered into in Iowa and the creditor resided in Iowa.)
  27. Restatement (Second) of the Law of Conflicts (1971), Section 187.
  28. Shapiro, Annotation, “Choice of Law as to Exemption of Property from Execution,” 100 A.L.R.3d 1235, 1238-39 (1980).