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Are Retirement Plans Really Protected?

Volume III, Number 1 – February 1994

Developments Since Patterson


In our September 1992 issue (AP NEWS, Vol. I, No.2) we reported that the U.S. Supreme Court, in Patterson v. Shumate, had resolved the national controversy regarding whether qualified retirement plan interests were reachable by creditors by its unanimous holding that such interests were protected.

Notwithstanding the seemingly clear directive by the U.S. Supreme Court inPatterson that such plan interests were exempt, bankruptcy trustees continue to try to subject retirement plan interests to the debtor-participant’s bankruptcy proceedings. In this issue we will examine those decisions in order to help you determine whether your qualified plan interests are protected.


In In Re Witwer, the California debtor was the sole shareholder and only employee of his corporation. Upon filing for bankruptcy relief under Chapter 7, he wanted to keep his $1.8 million profit-sharing plan interest out of the hands of the bankruptcy trustee. The court, citing a Labor Department regulation, held that a sole owner of a corporation was not an employee, could not therefore be an ERISA qualified plan participant, and distinguished Patterson on that basis, but nevertheless held the plan interest exempt under the California statute.

In In Re Lane, the New York debtor, a self-employed dentist, filed a petition for relief under Chapter 7 of the Bankruptcy Code. The dentist maintained two Keogh plans, and, even though he did employ unrelated persons in his practice, he made no contributions to the plans on behalf of any of them as would be required for the plans to be “qualified plans” under the tax laws.

The court held that neither Keogh plan was an ERISA qualified plan, both having failed to meet the non-discrimination tests prescribed by the Internal Revenue Code. The court went on to hold that non-qualified plans are not eligible for exemption under New York law which recognizes spendthrift provisions in qualified plans as if the trust were a spendthrift trust established by another person for the beneficiary. Since New York law, like other state laws, does not recognize self-settled spendthrift trusts, Dr. Lane’s “Keogh” plan interests were not exempt.

In In Re Schlein, the issue of the exemption of retirement benefits was approached from a different perspective than it was in Patterson. In Patterson, the decision centered around the spendthrift provision contained in the pension trust. Spendthrift provisions are generally recognized in trust law as exempting the trust beneficiary’s interest in the trust from the claims of his creditors as long as the beneficiary did not also create the trust.

The federal bankruptcy law provides an exemption for trust interests which are subject to a spendthrift provision which is enforceable under “applicable nonbankruptcy law”. In Patterson, the Supreme Court was required to decide whether the spendthrift provision required to be included in the pension plan by ERISA constituted “applicable nonbankruptcy law” for purposes of the bankruptcy exemption. As previously reported, the Supreme Court held that the ERISA required spendthrift provision did constitute applicable nonbankruptcy law, and the plan interests were therefore exempt from creditor claims.

The Schlein case arose under Florida’s retirement plan exemption law, and involved the exemption of the debtor’s SEP/IRA from his bankruptcy proceeding. SEP/IRA’s are special types of retirement plans which are not required to contain the spendthrift provision which was the linchpin of the Supreme Court’s holding in Patterson. ERISA provides that it preempts (overrides) any state law that “relates to” any employee benefit plan covered by ERISA, but ERISA also contains a “saving” clause which exempts from preemption any law of the United States. The Schlein court was faced with deciding whether the state law which specifically exempted such retirement plans from the claims of creditors was preempted by ERISA if it “related to” an ERISA plan – in which case the plan would be unprotected, or whether the state law was somehow “saved” by the ERISA saving clause – in which case the plan would be protected.

The court found that the Florida law did “relate to” ERISA plans. However – and this gets a bit complicated – because the Florida law was enacted to implement Florida’s decision to “opt out” of the federal bankruptcy exemptions and to adopt its own exemptions for such purpose, the Florida law replaced the federal exemption on this point, and became “federalized”. Thus, the court held that Florida’s law was a law “of the United States” and could not be preempted by ERISA because of its saving clause.


The Schlein decision was a good decision from a result standpoint; however, it may have been built on a legal house of cards. Why? Because the ERISA preemption and saving clauses which were the focus of the court’s decision only apply to “ERISA plans”, and SEP/IRA’s and IRA’s are generally not considered to be ERISA plans. Whether a SEP/IRA is an ERISA plan is unclear at best.

As mentioned above, under Department of Labor regulations, husband and wife business owners are not considered employees. A plan in which the husband and wife owners are the only participants is a plan without employees under the Department of Labor view, and, even though such a plan can qualify for favorable tax treatment, it will not be an ERISA plan, and its spendthrift provision may be ineffective to protect their plan interests. Some solace can be derived from the Schleindecision, however, in that the court has indicated a desire to “do the right thing”, by its holding that a plan funded by a husband and wife owned-business was exempt under the state law.

What other conclusions can be drawn from the post-Patterson cases? If you live in a state without its own law protecting retirement plans, you have cause for concern – SEP/IRA’s and IRA’s will not be protected, and your qualified pension or profit-sharing plan may also be exposed in such a state if you (or you and your spouse) are the sole owners of the business.

Globally recognized professional asset protection planners in U.S. Donlevy-Rosen & Rosen, P.A. is a law practice with a focus on offshore asset protection planning. Let us explain the significant difference our experience can make when you want to thoroughly protect your assets. Call 305-447-0061 or simply send us a message using our contact page